On August 20, we suggested that concern over "the Taper" could result in the S&P correcting to the mid-1500's into September, but that would probably present a nice intermediate term buying opportunity for many solid companies. In addition to the names with high cash and low debt that could withstand any further bump-ups in interest rates, there are also plenty of other "strong-fundamental" companies for stockpickers to find and purchase. These companies may not be sitting on such huge piles of cash, but due to their strong cash flows, they can weather potential storms. One such company is Arctic Cat (ACAT).
When it comes to investing in a solid company, I do subscribe to the Peter Lynch school of investing "in what you know." That includes the idea that you can inspect a company locally and discern some important things about their business that may not be as apparent to analysts on Wall Street. As such, it just so happens that I have many friends that spend a significant amount of Summer on dirtbikes and four wheelers, and a significant part of Winter on snowmobiles. I'll cover their relation to this article down a few sections, but just know that after talking to them, I was convinced to go ahead and write this article.
Obviously valuation is relative to future growth prospects, but lets see if the metrics can tell us anything.
Arctic Cat seems very reasonably priced relative to analysts future earnings projections. The company has a forward P/E of 14.36 and a PEG of .86 (anything under 1 is pretty good).
The company has averaged 78% EPS growth per year over the past 5 years, but analysts are only projecting EPS growth rates of 20% for the next 5 years, so there is room for them to be surprised.
The company has a long term debt-to equity and a short term debt-to-equity ratio of 0, which is great if interest rates rise any more and they need to seek loans.
However, Arctic Cat should not need to look for additional funding anytime soon because they have $48M in cash and investments and reasonable operating margins at 9.7%, which is about $58M. The dividend is usually another good gauge of financial health, and Arctic Cat pays a .75% dividend.
Recent Quarterly Results
Arctic Cat reported that they increased earnings to .40 a share -- 172% over last year. They increased sales by 9% for the same time period. That shows that the increase in earnings was due to increased efficiency and cost control -- always a good sign.
The company noted that the sales increase was across all product lines. This may indicate more effective marketing, or general demand for motor sports machines. They noted that sales of their newly offered side-by-side Wildcat line have been strong. They will reach further four-wheeler buyers by offering a "trail legal" model. This will allow the purchaser to ride on trails that other Arctic Cat models previously could not.
The company also noted that it repurchased 31,000 share of stock for $1.4M.
For Fiscal Year 2014, the company raised its earning guidance range for next fiscal year to $3.27 to $3.37.
Now, back to the Peter Lynch "buy what you know" part of this article. My friends and associates confirmed that there was a contingent of snowmobile users that previously thought that Arctic Cat 4-stroke engines were "dogs." Despite acknowledging their great suspensions, these buyers avoided the snowmobiles due to the weak engine. They generally opted for Yamaha, Polaris (PII), or Ski-Doo.
As of the announcement in February that Arctic Cat will be offering a Yamaha 4-stroke engine in their snowmobiles, perceptions have started to change. By finally offering a "good engine" -- at least as perceived by the former "haters" -- Arctic Cat can now reach those buyers that previously shunned them because of the engine questions.
While the company expects margins to come down a bit as they introduce the Yamaha engine sleds, I believe the change will result in significantly higher volumes.
Since I don't believe analysts fully appreciate this buyer sentiment, I think that the revenue increase could prove to be a bigger catalyst to the stock price than most people expect.
As you can see in the chart below, Arctic Cat has been rallying since the January with the rest of the market. It has pulled back, just as the broader market has. But this chart helps to show the strength and momentum it was experiencing. I expect the market (S&P) to correct further into the 1500's, but I would watch this stock to see if it holds this channel. If it does, I would be a buyer sometime in September when the market bottoms.
Wait and watch while the overall market achieves a more reasonable valuation compared to earnings. If this breaks down out of the channel, it should find some support at $46. If it can hold the channel, I'd just buy when people start panicking about the overall market. That could be as soon as next week, but more than likely it'll take a little longer.
Disclaimer: We do not know your personal financial situation, so the information contained in this article represents an opinion, and should not be construed as personalized investment advice. Past performance is no guarantee of future results. Do your own research on individual issues.