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Zack’s Bear of the Day: Arctic Cat

Outside of New England, and specifically Boston, snow levels have not reached last year’s levels, and spring is a month or a little more (dang you Punxsutawney Phil!) away.  Not the best conditions to be trying to sell snowmobiles.  Therefore, Arctic Cat is the Zacks Bear of the Day.

Arctic Cat (ACAT) a Zacks Rank #5 (Strong Sell) operates in a single industry segment and designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles.  The company markets its products through a network of independent dealers located throughout the contiguous US and Canada, and through distributors representing dealers in Alaska, Europe, the Middle East, Asia and other international markets.

Recent Earnings Red Flags

In late January Arctic Cat announced Q3 15 earnings results, which beat the Zacks Consensus Estimate by 44.68%, and came in just below the Zacks Consensus Revenue Estimate by -2.48%.  While this looks to be a decent quarter, there was one massive caveat; the company reported a large tax benefit which improved their EPS.  If this tax benefit was not realized (and normal management guided tax level of 35.5% was assessed) adjusted EPS would have come in at $0.39, below the Zacks Consensus Estimate $0.47.

The one-time tax benefit was not the only news to come out of Arctic Cat’s earnings announcement.  Management saw operating expenses jump to $29.1 million above the expected $26.9 million.  There was a one-time executive transition cost of $1.8 million, but still above expectations.  Further, snowmobile sales were below expectations in Q3, and sale of Parts, Garments, and Accessories (PG&A) also came in below expectations.  The misses are strongly correlated to the light amount of snow this winter in key areas.

Looking Forward

During the most recent earnings conference call management lowered FY 15 revenue guidance to $705-$715 million from $745-$755.  Further, in Q4 15 the company will be taking a $7 million charge to reduce dealers’ ATV inventory.  Moreover, about 30% of total revenues come from Canada, and the unfavorable currency exchange will further add to the decreasing revenues in Q4 15.

Declining Estimates

Over the past 30 days earnings estimates have significantly declined for Q4 14, Q1 16, FY 15, and FY 16.  Estimates for Q4 14 fell from -$0.30 to -$1.03, Q1 16 dropped from $0.39 to $0.21, FY 15 decreased from $1.97 to $1.27, and FY 16 fell from $2.36 to $1.88.

As you can see in the Price and Consensus graph below, expectations for Arctic Cat are declining.

Bottom Line

A light snow season and increased operational costs are a large drag on Arctic Cat’s revenues going into Q4 15.  This is further exasperated by decreased guidance from management, and the seasonality of their snowmobile sales.

If you are inclined to invest in the Leisure & Recreational Products sector, you would be wise to check out Smith & Wesson (NASDAQ:SWHC), and or West Marine Inc. (NASDAQ:WMAR) both carrying a Zacks Rank #2 (Buy).

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