Why This Small-Cap Stock Remains Undervalued

| About: Arctic Cat (ACAT)


This recreational focused small-cap had been beaten down of late, getting slammed again last week.

Shares are now trading well below peers and look to be in deep value territory, and there's a small dividend to protect on the downside.

With a suite of new products and international expansion, the upside could be as high as 40% in the interim.

Recreational products are one of the best investments in a rebounding economy. That's because consumers have more money to spend on discretionary products. One part of the recreational market that seem some of the greatest success is recreational vehicles. Yet, not all companies in the space have gotten the attention they deserve.

Arctic Cat (ACAT) has seen its shares fall nearly 45% from their 52-week highs earlier this year. It appears to be a very compelling deep value investment. Its P/E to growth (PEG) ratio is an ultra-low 0.6. The company has no debt and a return on invested capital of 23%. That kind of return on invested capital is hard to find; Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has an ROIC of half Arctic Cat's.

The most recent setback led to a 10% fall in shares, where its CEO announced a sudden departure. It gets a bit more complicated, where CFO Tim Delmore will take over. Delmore had previously announced his plans to retire, but will put that on hold. It was reported that the departure was mutual decision by the board and former CEO, Claude Jordan.

The investment firm Robert W. Baird reported that the move was quite unexpected, "billed as a mutual decision, the development is a disappointment for investors that see value in the Arctic Cat franchise"

What the market is missing

The market doesn't appear to be appreciating Arctic Cat's ability to expand overseas, nor the company's lineup for 2015. The company, and its dealers, are excited by the rollout of new products in 2015. Research and development spending was up 16% for fiscal 2014, so product development remains a key focus. They'll be launching 13 new snowmobiles this year, compared to 10 last year.

The company is also having its first ATV show since 2008 later this year. With the help of continued product development, more floor space at dealerships and a push to international markets, Arctic Cat should be able to hit its goal of $1.2 billion in revenue before fiscal 2019. That'll be nearly 65% growth in revenue from what it posted in 2014.

Decent dividend and impressive upside

It just started paying a dividend last year, after not paying a dividend for four years. Its current dividend yield is 1.4%. And its payout of earnings is only 14%, meaning there's plenty of room for the company to boost its payment. The company is also the cheapest among all recreational vehicle makers.

The average P/E ratio for the RV industry is over 17, while Arctic Cat trades at a P/E ratio of less than 13. A P/E of 17 also happens to be Arctic Cat's historical average P/E ratio. Just assuming that Arctic Cat should trade in line with the industry average P/E of 17, the upside is to $50. That's 40% higher than current levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.