Please ensure Javascript is enabled for purposes of website accessibility

Why Snowmobile Maker Arctic Cat Inc. Stock Plunged 11%

By Beth McKenna - Jan 23, 2014 at 9:24PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Arctic Cat's shares plummeted after the company significantly missed earnings estimates and lowered guidance.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis. 

Shares of Arctic Cat (ACAT) were off as much as 20% in Thursday's trading, though they rallied near the close to end the day down 11%. The snowmobile and off-road vehicle maker reported before the market open that its fiscal third-quarter earnings had missed the mark. 

Veering off track
Arctic Cat posted earnings per share of $0.89, down more than 31% from the prior-year's period, and 33% off the consensus estimate of $1.33. Revenue rose 3.6% year over year to $225.8 million, somewhat short of the $239.38 million that analysts had expected.

The company also lowered both earnings and revenue guidance for fiscal 2014. It now expects EPS in the range of $2.90 to $3.00 vs. the consensus of $3.25, and revenue of $740 million to $750 million vs. the consensus of $749 million. Previous guidance called for EPS of $3.27 to $3.37 on revenue of $754 million to $768 million.

CEO Claude Jordan noted that the company achieved double-digit sales growth in its off-road (which includes all-terrain and side-by-sides) and parts, garments, and accessories businesses, and cited the company's reduced profitability as "chiefly due to anticipated lower gross margins on snowmobile models built for Yamaha, as part of our new partnership this year, and ATV product mix."

Arctic Cat had warned last quarter that it expected the second half of its fiscal year to be challenging, due primarily to the new Yamaha partnership and the continuing difficult economic climate in Europe. 

On a positive note, Jordan said the company is expecting strong fourth-quarter sales and earnings, driven by the launch of its new 2014 Wildcat 50 Trail model. The company's been beefing up its Wildcat line of side-by-sides, also adding the 2014 Wildcat X Limited to its line-up in November, and is slated to start selling a four-seater Wildcat 1000 in February. Side-by-sides are the fastest-growing category of powersports vehicles, so Arctic Cat, as well as competitors such as Polaris Industries have been rolling out new models.

Looking ahead
It's not surprising that investors are shaken, as Arctic Cat significantly missed on earnings last quarter, too. (EPS came in at $1.70, down from $1.80 in the prior-year's period, and short of the $1.96 consensus.) Additionally, the company's lowered guidance equates to EPS growth in the flat to about 4% range on revenue growth of about 12% to 14%.

Value investors might find the stock compelling after today's drop. The company has no debt, has been rolling out side-by-sides that are expected to sell well, and is trading at a price-to-earnings ratio of about 14 and five-year price-to-earnings growth, or PEG, of 0.8.

That said, I've long favored Polaris in this space. While it's considerably pricier, it's been performing like a fine-tuned engine, so growth investors might want to explore Polaris.

Fool contributor Beth McKenna has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Arctic Cat Inc. Stock Quote
Arctic Cat Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.