Snowmobiles Offer Signs of Hope

 | Jan 27, 2012 | 10:04 AM EST  | Comments
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I've had my doubts about an economic recovery. It's hard to ignore the improvements in some areas of the economy we are staring to witness, but the Austrian School economist in me is skeptical and still sees some frightening longer-term headwinds.

Massive government debt, massive government spending and little will to actually address the issue, just to name a few, and that's just scratching the surface. I also don't know how you get around heavy inflation at some point.  If someone has an answer to that question, I'd love to hear it. I certainly don't mean to be a downer on a Friday, but this stuff can keep you up at night.

But I continue to see some encouraging signs, reflecting consumer spending in some of the small names that I follow. It may be small potatoes in the scheme of things, but without the consumer showing some confidence and opening up the wallet there's little chance of any type of real recovery.

On Thursday, snowmobile and all-terrain vehicle manufacturer Arctic Cat (ACAT), a member of my JIMS CRAB FEST portfolio for cheapskates, reported a blowout quarter. It does not get much more discretionary than snowmobiles and ATVs, so this is a small, but potentially positive sign that some consumers are feeling better. Unfortunately, that confidence is not being felt by all, with still ridiculously high unemployment and under-employment rates.

For the quarter, snowmobile sales rose 61% and ATV sales were up 12%.  Total revenue jumped 36.2% to $207 million, well above the $182 million consensus estimate. The bottom line jumped nearly 84% to $17 million, or $0.92 per share, destroying the $0.59 consensus estimate. Gross margins improved 154 bps to 23.1%, while the net margin jumped 213 bps to a healthy 8.2%. I'm not sure that this quarter could have been any better. The company also raised earnings guidance for the full year, which ends in March, to $1.60-1.70 from $1.10-$1.15.

The balance sheet remains very strong. Arctic Cat ended the quarter with $76.3 million, or about $6.20 per share in cash and no debt. While cash was reduced from $107 million for the same period last year, there's a good reason for that.  Near the end of the quarter, the company repurchased Suzuki Motor's 6.1 million share stake of Arctic Cat class B shares. That reduced shares outstanding by nearly one third to 12.3 million.

Arctic Cat shares jumped 20% Thursday and have more than doubled in the past year, making it the best performer in the JIMS CRAB FEST portfolio.  This company certainly has come a long way since emerging from bankruptcy in 1983. In the past year, it may have even made the leap from value to growth. We'll see if the company can sustain the run that it's been on, which has been nothing short of spectacular. I hope that success by this small snowmobile company reflects better times ahead, but remain skeptical. Don't sell your gold just yet.

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