This has been a frustrating year for finding large-cap value stocks, but the situation is slightly better if you're able venture into small-cap and micro-cap land.
I continue to turn over rocks within the "double-net" space -- companies trading at between 1x and 2x net current asset value -- and I occasionally find some names worth digging into. One such stock: snowmobile maker Arctic Cat (ACAT), which put up some disappointing numbers recently and is down more than 50% so far this year.
Arctic Cat had enjoyed a huge and somewhat surprising comeback following of the 2008 market debacle, despite an environment that wasn't exactly friendly for recreational equipment (ACAT also makes all-terrain vehicles). The company put up some great earnings results between 2012 and 2014, and shares rose from $3.50 in early 2009 to peak at nearly $60 in late 2013.
But ACAT was only marginally profitable in its fiscal-year 2015, which ended last March. And with two fiscal-2016 quarters already in the books, results will likely be similar this time around.
The company's disappointing second quarter saw revenue fall 19.5%, chiefly due to a 30% drop in snowmobile sales that historically peak during the quarter. Warmer weather was a problem, as were currency headwinds (approximately 30% of annual sales come from Canada).
All of that has helped push Artic Cat's stock down to around $16 a share, a level last seen in 2011. Given that snowmobiles represented 43% of the company's total fiscal sales in the last fiscal year, ACAT has a lot riding on a turnaround in that business.
Plenty of Positives Remain
Still, one of the interesting moves that Arctic Cat made in recent years was to significantly reduce its shares outstanding through a 2011 purchase of Suzuki Motors' 6.1-million-share stake. Management paid $79.3 million in cash for the stock, or $13 a share. As a result, ACAT's shares outstanding are about 29% lower than they were at fiscal-year 2011's end.
The company also has a balance sheet that looks good enough to weather the current storm. Arctic Cat ended the latest quarter with $10.7 million in cash and just $15.8 million in debt.
ACAT's third quarter has historically been good in terms of generating cash flow, but that remains in doubt this time given snowmobile sales' sharp drop-off. Last year, snowmobiles generated 42% of ACAT's third-quarter revenue.
As for the stock itself, it's currently trading at just 1.15x tangible book value per share and 1.9x net current asset value. Consensus estimates call for fiscal 2017 earnings of $1.10 per share, putting the forward P/E at about 15x. Shares also currently yield 3%, and while I don't foresee Artic Cat cutting its dividend at this point, that has to be a possibility in the future if ACAT doesn't land on its feet soon.
The Bottom Line
Banished to double-net land and severely beaten up, Arctic Cat has much to prove to investors. But at least it's back on my radar screen.
