Polaris Industries (NYSE:PII) has long owned the trail-legal ATV market with its RZR 800 side-by-side, the first competitive sport utility task vehicle to be narrow enough to fit between the 50-inch-wide gates placed at the head of most ATV trails.
When Arctic Cat (NASDAQ:ACAT) introduced its competing Wildcat Trail side-by-side, or SxS, as they're called, it not only gave recreational riders a second UTV to choose from, but challenged Polaris's supremacy in the space and earned it the undying enmity of its rival, which promptly sued it for violating its patents.
Polaris and Arctic Cat have a long history of suing each other for patent infringement, and though Arctic Cat just won a major victory that could turn the tide in the recreational UTV market, it's questionable whether it will be the powersports vehicle maker to dethrone the RZR as the UTV of choice, or if it will be left to Can-Am, China's CFMOTO, Honda Motors (NYSE:HMC), or someone else to do the deed.
Sharing the experience
Side-by-side UTVs have been around for decades, stretching back as far as the Jeep, which is considered the forerunner of today's SxS's, but it wasn't until Polaris introduced the RZR by Polaris in 2007 that the industry was transformed.
Where most designs sought a balance between functionality and recreational enjoyment, the RZR basically abandoned utility and went all out for fun. But what really set it apart from the crowd was it being the first recreational UTV that met federal standards for maximum vehicle width to ride on trails. That alone caused an explosion in popularity that catapulted Polaris to the forefront, a position it still holds today.
Arctic Cat's response was 2014's Wildcat Trail, a UTV of similar design and capabilities that made it an instant hit and was the primary contributing factor Arctic Cat's 17% growth in side-by-side sales that fiscal year.
I'll see you in court
It also made Arctic Cat an immediate target of a lawsuit by Polaris, which claimed the Wildcat infringed on all 38 claims in its '405 patent, a wide-ranging patent that largely covered the UTV's frame, engine, and transmission design, as well as its low center of gravity.
That was one of the key distinguishing features that Polaris said made the RZR so popular. By keeping the UTV close to the ground, it made it less susceptible to rollovers and thus safer. Arctic Cat objected Polaris's designs were unenforceable because they were obvious. And earlier this month the U.S. Patent Trial and Appeal Board agreed, dismissing all of Polaris's '405 claims saying they were unpatentable, a potentially huge win for Arctic Cat as it rolls out the newest versions of the Wildcat. But it still needs to overcome the biggest hurdle that has hurt sales: a lack of comparative horsepower.
Power to perform
Even in its fiscal third quarter earnings conference call last month CEO Christopher Metz admitted the lower horsepower offered by the Wildcat in comparison to the competition (read: the RZR) had hurt sales. In addition to a generally weakening market brought on by a soft economy, plus the effects of currency exchange rate on results, its weaker models kept customers at bay. While it intends to address that flaw with the 2017 models, Polaris hasn't been standing around waiting to see what Arctic Cat would do.
The 2016 RZRs featured a 144-horsepower turbocharged engine that provided nearly 50% more torque and a completely re-engineered drivetrain. Many industry watchers are hoping Arctic Cat can deliver on a 150-hp Wildcat, as doing so will make it a real powersports vehicle contender.
David vs. Goliath
Despite being a smaller company, Arctic Cat has shown it is possible to take on the powersports industry's powerhouse and win, at least in court. The marketplace is a different battlefield altogether, however, and we'll also be seeing Can-Am, Honda, Yamaha, and others introducing new models too.
In short, Polaris Industries may have lost a battle, but not necessarily the war. The competition is smaller, fragmented, and it remains the one to beat. It won't be achieved by Arctic Cat simply showing up for a fight, which is what it's done previously; it needs to wow the market with a convincing product, otherwise it's rival will declaw it once again.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool is short Deere & Company. 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.