With gas prices still pretty steep, no one's expecting terribly good news from Motley Fool Hidden Gems watch list stock Arctic Cat (NASDAQ:ACAT) Tuesday. High gas prices not only drained holiday present buyers' wallets, but they also dissuaded people from buying gas-consuming toys for themselves. So when reaching for this Cat's fiscal Q2 2006 report, investors should be ready for a shock.

Wall Street Wisdom:

  • General consensus. That's the analyst view, at least. Of the four learned fellows who follow the stock, each one is keeping a safe distance and a "hold" rating.
  • Revenues. Second verse, same as the first. Analysts think sales will be essentially flat against last year's fiscal Q2.
  • Earnings. Meanwhile, they believe the company incurred higher raw-materials costs to build its wares and probably needed to lower sales prices, just to keep the sales flatlined. Result: Profits are believed to have fallen more than 20% to $0.22 per share.

Margin watch:
High raw-materials costs, combined with pricing pressure, has left Arctic Cat's margins all wet and looking decidedly drowned-rat-like.

Margins

6/04

9/04

12/04

3/05

6/05

9/05

Gross

20.7%

20.1%

19.3%

19.7%

20.0%

19.4%

Op.

6.5%

6.0%

5.2%

5.8%

5.8%

5.5%

Net

4.5%

4.2%

3.6%

4.1%

4.1%

3.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

What's that smell?
Buried in the kitty litter of last quarter's 15% sales rise were twin 25% spikes in inventories and accounts receivable. Let's hope tomorrow doesn't reveal a similar mess.

Key ratios:
Arctic Cat sports a P/E of 16 and a price-to-free cash flow ratio of 14. But back out its cash, and that second ratio transforms into a tempting enterprise value-to-free cash flow ratio of just under 12. If the company can disprove analyst projections of 6% long-term growth, investors at today's price could be rolling in catnip. If not, they may develop a sudden allergy to this stock.

Competitors:
Arctic Cat's main public competitor would be fellow ATV- and snowmobile-maker Polaris (NYSE:PII). Less directly, the firm also competes against Harley-Davidson (NYSE:HDI) and Honda (NYSE:HMC).

Arctic Cat is on the Hidden Gems watch list . For more cool-cat, underfollowed stock ideas, click here for a 30-day risk-free trial.

Fool contributor Rich Smith does not own shares of any company named above.