Yesterday's earnings report had investors purring in contentment with snowmobile and all-terrain-vehicle maker Arctic Cat (NASDAQ:ACAT). But wait -- what's that on the carpet? Has this Cat been making a mess?
Here's what investors liked about Thursday's report:
- Sales rose a decent, if not frisky, 5% in the first quarter of fiscal 2006, compared with Q1 2005.
- Profits per diluted share beat estimates. Analysts had the Cat pegged for a $0.03 loss this quarter, but the company actually produced $0.02.
- What's more, those two pennies doubled Arctic Cat's historical profit for this usually weak selling season. In each of the past two years, Arctic earned just a penny in profit per diluted share in its fiscal first quarters.
- Finally, the company remained firm in predicting somewhere between $1.31 and $1.40 in diluted earnings per share for fiscal 2006.
With analysts agreeing that $1.34 is the likely number for full-year earnings, and Arctic Cat having just proved them overly conservative this quarter, investors may be expecting more good news throughout the year. Strangely, given Wall Street's usual shortsightedness, the company's advice that it expects to earn just $0.90 to $0.94 in Q2 2006 -- far short of analysts' hopes for $0.97 -- didn't have the usual effect of crushing the company's shares. In fact, the Cat initially gained 6% in the wake of its news.
However, before all of you Arctic Cat shareholders begin looking for a sunny spot to nap, be warned -- it wasn't all yarn and catnip in yesterday's report. A few notable hairballs:
- Net cash is down dramatically over the past year, suggesting that Arctic Cat's GAAP profits may not be translating into a whole lot of free cash flow.
- Accounts receivable ballooned 29% year over year.
- Inventories grew 25%.
As much as we prefer GAAP profits to the losses that analysts expected, none of those developments speaks well of the quality of Arctic's earnings. For that reason, this Cat bears watching over the next few quarters -- it may not be fully housebroken.
Not quite sure whether this is the right Cat for you? Consider an alternative in rival ATV maker Polaris (NYSE:PII), which my Foolish colleague Matt Thurmond wrote about just last week.
Arctic Cat is a Watch List stock of the Motley Fool Hidden Gems newsletter, where we constantly monitor our recommendations and runners-up, updating you on major developments with mid-month and semi-annual reviews in our newsletter. Take a free trial right now for full access to our archives, and see for yourself.
Fool contributor Rich Smith has no position in any of the companies mentioned in this article.
