Arctic Cat hosted an analyst day and snowmobile ride on Tuesday, Feb. 5, in West Yellowstone, Mont., bringing together most of the sell-side analysts who cover the stock.
Feltl and Company analyst Mark Smith provided Powersports Business with a research note about the event:
“The snowmobile ride went very well. We had the opportunity to ride two-stroke and four-stroke snowmobiles from ACAT both inside Yellowstone and outside of the park. We are impressed by the performance of the snowmobiles. As a reminder, we rode the RMK 800 from Polaris (PII-Buy) and the Summit 800 from Ski-Doo (a unit of BRP) last week, which compete against ACAT’s M800. We think the M800 competes well against their two largest competitors in terms of power, handling and durability. We think, and our channel checks show, more acceptance and respect for the new chassis that was introduced on model year 2012 snowmobiles and tweaked slightly in 2013. We think the two strong selling points for the M800 are the impressive 800cc engine and the new track on the mountain sleds. We think this product can continue to gain share in the mountain category against two strong peers.
“Snowmobile inventories and current trends bode well for ACAT. ACAT recently reported that dealer inventories were up 14% year-over-year at the end of the December quarter. We think dealer inventories have declined significantly since the beginning of the year with better snow levels. We would like to see more rebate programs to lower dealer inventory and appease some dealer complaints, but we think they are not necessary to see continued growth. ACAT holds its annual snowmobile show in a few weeks to introduce new products to dealers and we expect new products in the snowmobile segment that will boost sales in mountain sled category. We model snowmobile sales will increase 4.2% in F2014 with the majority of the growth in international sales.
“We were able to view the entire Wildcat lineup and are impressed with the evolution of the product. Management brought all of the company’s Wildcat products to the analyst day to view, the original Wildcat (now second generation), Wildcat Limited, Wildcat 4 (four seater) and the Wildcat X. We are impressed with how far the products have come in approximately one year’s time. We think the specs on all of the products are impressive and ACAT competes well against its two largest competitors, Polaris and BRP. Below is a breakdown of all of the products in the Wildcat family.
“Original Wildcat. The original Wildcat has seen tweaks to make it more competitive and to fix any supposed shortcomings in the first generation product. Most important is a new clutch which improves speed, acceleration and power when needed. The original Wildcat will still sell well going forward, in our view at an attractive price point, but we expect the majority of the sales to come from other iterations of the Wildcat. The Wildcat MSRP is $16,999.
“Wildcat Limited. The Limited Wildcat has mostly aesthetic changes from the original including painted A-arms, different paint schemes, two-tome seats and the addition of aluminum bumpers. The Limited also has the new clutch beginning in February. We think this product will sell well through 4Q:F13 and F2014. The Wildcat Limited has a MSRP of $17,699.
“Wildcat 4. We view the Wildcat 4 as the most incremental new item in the Wildcat family. We think more consumers are migrating to four-seater side by sides due to the ability to have more passengers as well as the improved ride with a longer wheel base. We think the product looks great and cannot wait to take it for a comparative test drive against its closest competitor, the RZR XP 4 from Polaris. We are encouraged that ACAT beat BRP to the market with a high-end fourseater side by side. With an MSRP of $19,599 it does not take too many unit sales to move the needle for ACAT. If ACAT can drive its ATV, Prowler and two-seat Wildcat sales of flat-to-1% growth in F2014 and sell only 2,000 Wildcat 4s than it can hit our estimate of approximately 10% growth in Off-Road Vehicle (ORV) sales, in our view.
“Wildcat X. ACAT recently announced the Wildcat X and will begin shipping this product to dealers in March. This product has many improvements over the other models including improved power from tweaks to the engine that drive more horsepower, the new drive and driven clutch developed with Team Industries, new sway bar, new shocks and improved tires. The MSRP is $18,499, and we think ACAT will derive strong sales with this product. We think the price point is competitive given the incredible specs and expect a strong reception from customers to this product.
“Other highlights from the analyst day:
“Product development is a key to ACAT’s continued success. We think management’s focus on product development is evidenced by the Wildcat lineup after one year of sales. We think there is still more in the pipeline in the Wildcat family, but expect continued product development in snowmobiles, ATV’s and Prowlers.
“Side by sides are the current focus for growth. Management indicated that it thinks the side by side category will continue to grow over the next several years and they can take advantage as well as help spur that growth. We expect, and management indicated that ORV will encompass half or more of total sales in the not too distant future.
“ACAT is adding new dealers as well as new markets. Management assuaged some fears by stating that its dealer network is stronger and larger than in the past. We think there is an opportunity to continue expanding the dealer network. Additionally, management discussed adding new markets such as Mexico and Australia.
“There was a long discussion on gross margin improvement opportunities. We think gross margin will expand as volume increases and as the mix of PG&A improves. Increasing sales of accessories for Wildcat is the easiest and most likely path to rapid margin improvement, in our opinion. Wildcat currently has over 100 accessories available for purchase, and as customers gain more knowledge of the potential, we expect sales will increase. We do not have great visibility into future gross margin potential, but ACAT’s largest public peer (PII) has higher gross profit margin and gross margin has improved significantly over the last several years.
“Guidance implies strong growth in 4Q:F13. Management’s guidance in 4Q:F13 implies strong sales in ORV and PG&A, 27%-42% and 8%-15% growth, respectively. Our estimates are at the low-end of management’s guidance range for these categories in 4Q:F13. We note that guidance was discussed in depth as analysts look forward to F2014 guidance which will be issued in May.
“We tend to think that management will continue its trend of giving conservative guidance early in the year, and note that it may likely come in lower than current consensus estimates for earnings.
“ACAT has a strong balance sheet and is debating uses for its cash. ACAT currently has approximately $97mm in net cash on the balance sheet, or about $7 per share. We think the company will continue to invest in new product development and we could see an increase in R&D expense, but the company would still have ample cash to use for dividends, share repurchases or acquisitions. We think a mix of all three of these options is the most likely as opportunities arise.
“We do not expect a large dividend to be paid in the near term, but think a dividend policy makes sense. We note that management seems hesitant to lower the float too significantly with share repurchases, but will be aggressive when the shares are attractive.
“There are ample opportunities for growth. ACAT has loyal customers in its snowmobile market, and is leveraging its strength in snow to grow its ORV business. We expect continued strong growth in both sales and earnings. When asked how far the company is in its growth trajectory, management indicated it is in the very early innings of what they think the company can accomplish.
“We are reiterating our STRONG BUY rating. Overall we came away from the analyst day and snowmobile ride impressed with the growth and evolution in ACAT. We think the company is growing in all of its segments and is taking share. ACAT shares are inexpensive, in our view, trading at 10.7xx our F2014 EPS estimate and approximately 8.6x when backing out the $7 net cash position. We think these multiples are cheap given the strong earnings growth (60%-66% this year and we project 17.4% next year). We are reiterating our STRONG BUY rating. We derive our $53 price target by applying a 16x multiple to our F2014 EPS estimate of $3.30.”