The Polaris Industries RZR side-by-side revolutionized the ATV industry, but it's being challenged by rivals like Arctic Cat. Image source: Polaris Industries.
Arctic Cat (NASDAQ: ACAT) was late to the game when it came to making side-by-side all-terrain vehicles, but finally entered the market in 2012. Polaris Industries (NYSE: PII), which has been making such ATVs since 1998, says its rival is trying to make up for lost time by manufacturing vehicles that violate its patents. Polaris sued Arctic Cat in December, saying the powersport-vehicle maker violated its 501 patent regarding air-handling and suspension systems for utility vehicles.
This isn't the first time the two ATV makers have clashed over proprietary vehicle designs with their disputes ending up in court. In fact, Polaris and Arctic Cat have a long history of suing each other. In the latest episode, just last month Arctic Cat not only answered Polaris' latest suit by saying it hadn't infringed on Polaris' patents, but also filed its own lawsuit against its rival, charging that Polaris violated three of Arctic Cat's patents.
Aside from simply wanting to protect their investments in research and development, there's good reason the two willingly take each other to court with such frequency: The all-terrain-vehicle market, and specifically side-by-sides, have become key growth drivers for both companies.
Honda Motors in the 1960s largely created the three-wheeled all-terrain vehicle we associate with the market today, and made its first sale in North America in 1971. It was subsequently followed by other Japanese manufacturers like Kawasaki, Suzuki, and Yamaha, with manufacturers switching to four-wheel models, or quads, in the late 1980s as safety concerns with the three-wheel version mounted.
Polaris introduced its first ATV in 1985, but it was the production in 2007 of its 50-inch-wide RZR that launched it to the forefront of the ATV industry. Trails on federal lands have maximum width regulations, and the RZR side-by-side was the first UTV, or utility task vehicle, designed for recreation that could meet those standards. Polaris quickly became and remains the industry leader today.
Yet competition is tight as the market weakens. In its fourth-quarter earnings report last week, Polaris reported that off-road-vehicle sales tumbled 20% from the year-ago period and were down 1% for the full year. Similarly, Arctic Cat's fiscal 2016 third-quarter revenues were down 28% year over year, and it suspended its quarterly dividend to conserve cash.
Keeping and growing market share becomes ever more important for these manufacturers, and increasingly they're resorting to the courts to help preserve their position. Two years ago they were battling over Polaris' 405 patent, specifically Arctic Cat's Wildcat side-by-side allegedly violating the patent associated with Polaris' 50-inch-wide RZR. Late in 2014 they were at it again over the same issue, with Polaris bringing two lawsuits against its rival. In the late 1990s and early 2000s, it was snowmobiles they were suing each other over.
Both Arctic Cat and Polaris Industries have forecast weak markets for the foreseeable future. The former lowered its sales outlook for the full fiscal year that ends in March by about 3%, and the latter said it expects consolidated sales to be anywhere from 3% higher to falling 2% from last year. Amid such a malaise, investors should expect there won't be any let-up in the bad blood back-and-forth between these two powersports rivals, though it's doubtful their tit-for-tat court appearances will help either turn sales around.
