Tags
ATV, Earnings, Engines, Innovation, Investing, Partnerships, Production, Snow, Snowmobile, Stocks, Winter
Company Description-
Arctic Cat Inc. (ACAT) is a Minnesota based company that designs, engineers, and manufactures snowmobiles, all-terrain vehicles, and Side by Sides (a type of small off-road vehicle). They also produce accessories and garments. They are one of the most respected and well-known snowmobile brand names and have increased their standing in the ATV market recently as well. The company mainly markets its products within the U.S and Canada, but they also have distributors who represent dealers in international markets within the Middle East, Europe, and Asia.
What changes has the company made recently?-
In 2010, Arctic Cat made a decision to start producing most of its own engines for its snowmobiles. Suzuki had been supplying the company with engines for 25 years and will be continuing to supply support to older model snowmobiles, but will slowly be phased out as Arctic Cat plans to start production of their snowmobile engines in 2015 at a facility they already possess in St. Cloud, Minnesota. By doing this, they hope to gain more control over their production and costs, as well as better utilize their resources. The St. Cloud facility has been a location where Arctic Cat has produced their ATV engines since 2007, and thus there is quite a bit of machinery already located there which will help to cut down on switching costs. They also have not been operating at full capacity so this should also cut down on wasted space and cost. The company has many skilled engineers in St. Cloud who have been creating ATV engines for years and should have minimal problems in switching to snowmobiles.
So why the change?-
Many people were taken back at the decision that Artic Cat made on dropping Suzuki as engine supplier and deciding to make their own. Suzuki is one of the most popular and most successful brand names in extreme sports and has a fantastic reputation within this community. So why make this decision now after 25 years of working together? As mentioned previously, this is an opportunity to lower costs and gain more control over operations. One problem that Arctic Cat had experienced in their relationship with Suzuki was that Suzuki has not wanted to utilize the kind of technology that Arctic Cat wanted and instead have stuck to their traditional models. Arctic Cat facilities have a reputation for being highly efficient and using innovative technology in producing snowmobiles, ATV’s and the engines that they have produced. This may be Arctic Cat’s way of announcing that they want to step up their game a little and produce their engines the way they want them to be produced. Whereas suppliers may have been reluctant to try new things as they would not want to incur potential R&D costs that may have come, Arctic Cat is ready and trying to attempt new things and use new technologies in order to improve their companies’ image and create a stronger and better product.
Recent earnings report-
Arctic Cat is currently sitting at a stock price of around $43. This is well below the high price in March of about $49 and substantially lower than the price of $55 that the company peaked at in early January. Why has it gone down so much in such a short time? Some of the drop can be contributed to the recent problems in the stock market, but the answer lies in the recently reported earnings statements. Arctic Cat’s numbers were very disappointing and they missed their overall goals as well as their snowmobile goals by quite a lot. Claude Jordan, the CEO of Arctic Cat believes that the poor results were due in some part to economic issues in Europe, and also due in part to lower gross margins on snowmobiles as a result of a recent partnership with Yamaha in the snowmobile sector. The company also lowered their expected growth and sales numbers for 2014 after the reports which led to a further drastic selloff of the stock by investors. Although the poor numbers were a definite setback for Arctic Cat, I do not believe they are a harbinger of things to come. Record snowfalls this winter set the stage for increased snowmobile sales and the production of engines in the St. Cloud facility will lead to lower costs and possibly lower prices for snowmobiles. The company has also been making some strategic moves to grow their off-road vehicle segment and increase their market share within the segment.
Stock Analysis-
Personally I think that this is a fantastic stock with great potential. However, they may not have reached their potential just yet and it may be some time before they do so. That being said, I still believe that they should be a buy as they are very undervalued at this point in time. The company’s revenue and gross profit growth has been steadily increasing and they have a very strong current ratio. They also are very effective and have high ROE’s and ROA’s year after year. Analyst estimates are also very favorable for the company as their stock price is considered quite undervalued at the moment. The consensus of most analysts is that the stock should be rated a buy and that its value at the very least should be in the upper $40’s. Their poor earnings report led to a giant selloff but consumers likely overreacted and the stock should see a rise relatively soon. Whether it will rise back to where it was at the start of January in the near future or whether it may take longer is debatable, but one thing is certain: $43 is not the highest price that this stock will see. If you are an investor looking for massive gains in the near future, then Arctic Cat may not be the investment choice for you, but for patient investors who believe in the future of this company, this stock could bring some decent returns to a portfolio.