Arctic Cat Inc. Cat Scratch Fever: ACAT s 3Q:12 blew through estimates, raising target to $37

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1 Arctic Cat Inc. Company Description: Arctic Cat Inc. designs, engineers, manufactures and markets snowmobiles and off-road vehicles including ATV s and side-by-sides. In addition to power sports vehicles, the company also sells parts, garments and accessories. The company was founded in 1961 and is headquartered in Thief River Falls, MN Feltl and Company Research Department 2100 LaSalle Plaza 800 LaSalle Avenue Minneapolis, MN Mark E. Smith mesmith@feltl.com Consumer- Retail January 26, 2012 Cat Scratch Fever: ACAT s 3Q:12 blew through estimates, raising target to $37 (ACAT - $28.80) BUY Key Points Arctic Cat (ACAT) reported 3Q:12 results significantly higher than expectations. Revenue of $207mm was significantly higher than our $184mm estimate. Snowmobile sales of $125mm blew through our $106mm estimate. Offroad vehicle sales were $54.4mm compared to our $50.5mm estimate and PG&A sales of $27.4mm were slightly better than our $27.3mm estimate. Gross margin was higher than expected. Gross margin of 23.1% was 100 bps higher than our estimate. We note that low snow levels impeded PG&A sales which carry higher margin, so we are impressed with the improved margin, even with a less favorable revenue mix. ACAT reported 3Q:F12 EPS of $0.92, well above our $0.58 estimate. The company leveraged its operating expenses with the strong sales and disciplined spending. We had previously been concerned with higher operating expenses with the launch of the new Wildcat side by side, but our concerns were unjustified. 3Q:12 Actual 3Q:12 Estimate Variance 3Q:11 Actual YOY Change Total Revenue $207,022 $183, % $151, % Operating Profit $26,183 $16, % $12, % Net Income $17,028 $10, % $9, % Diluted EPS $0.92 $ % $ % Financial Summary Rev(mil) 2011A 2012E 2013E Jun $63A $75A $81E Sep $176A $205A $219E Dec $152A $207A $206E Mar $73A $89E $97E FY $465A $576E $602E P/Sales 0.76x 0.61x 0.59x EPS 2011A 2012E 2013E Jun ($0.25)A ($0.13)A ($0.17)E Sep $0.97A $1.15A $1.70E Dec $0.50A $0.92A $1.18E Mar ($0.52)A ($0.60)E ($0.59)E FY $0.70A $1.66E $2.15E P/E 41.1x 17.3x 13.4x Management raised F2012 guidance. Management raised its F2012 revenue guidance to $568-$575mm from $530- $545mm. Additionally management raised EPS guidance to $1.60-$1.70 from the prior range of $1.10-$1.15. Consensus prior to the release was $1.22 and our estimate was $1.23. We are raising our F2012 and F2013 estimates. We are raising our revenue estimates for F2012 and F2013 to $576.2mm and $602.4mm, respectively, from $544.8mm and $572.9mm. Our F2012 estimate is within management s guidance range. We are raising our F2012 and F2013 EPS estimates to $1.66 and $2.15, respectively, from $1.23 and $1.79. Our F2012 EPS estimate is within management s guidance range. We are raising our price target to $37 from $30. We derive our new $37 price target by applying a 17x multiple to our new F2013 EPS estimate of $2.08. Our valuation methodology is unchanged, but we think an argument can be made for a higher multiple given the strong earnings growth. Please see important disclosures on pages 3 to 5. Price: $ Week Range: $ Target: $37.00 Rating: BUY Shares Outstanding: 12.3 mil Mkt. Capitalization: $354 mil Ave. Volume: 128,200 Instit. Ownership: 77% BV / Share: $11.56 Debt / Tot. Cap.: 0% Est. LT EPS Growth: 22%

2 We are reiterating our BUY rating. We are encouraged by the strong sales and earnings growth in 3Q:F12 and management s outlook. We think that snowmobile sales are driving nearterm results, but the side by side business and the new Wildcat will help drive results in F2013. With loyal customers, high demand for its products and new products coming to market, we are reiterating our BUY rating of ACAT. We think ACAT shares are undervalued trading at 13.4x our new F2013 EPS estimate. Arctic Cat (ACAT) reported better-than-expected 3Q results. Sales of $207.0mm exceeded our $183.9mm estimate and consensus of $181.8mm. Snowmobile sales were the largest driver of the outperformance with sales of $125.2mm compared to our estimate of $106.1mm. Snowmobile sales increased 61% year over year. ATV sales were better than expected at $54.4mm compared to our estimate of $50.5mm. We are encouraged by the strong ATV sales considering the product that we expect to be a growth catalyst, the Wildcat side by side, had very limited impact on 3Q:F12 results. PG&A sales of $27.4mm were roughly inline with our $27.3mm estimate. We think PG&A sales were impeded by lack of snow; no snow means people don t ride their snowmobiles and buy oil and garments or break parts that need replacing. We think with recent snowfall that pent up demand for riding could drive improved PG&A sales in 4Q:F12. Gross margin of 23.1% was 100 bps better than our expectation. We are encouraged by the strong gross margin given the highest margin category, PG&A, just met expectations. The strong sales and managing expenses helped drive operating margin of 12.6%, well above our 8.8% estimate. 3Q:12 EPS of $0.92 beat our $0.58 estimate and consensus of $0.59. We are encouraged by the strong results and think the momentum will continue into F2013. Management raised its F2012 guidance and we are raising our estimates. Management raised its F2012 revenue guidance to $568-$575mm from $530-$545mm. We are raising our F2012 revenue estimate to $576.2mm from $544.8mm and are slightly above management s guidance. Management indicated that off road vehicle sales would rise 19%-22% in F2012 which implies 34%-45% year-over-year growth in 4Q:F12. Our estimate is at the low end of management s guidance range. However, we are concerned with rebate costs for snowmobiles in 4Q:F12 which tempers our estimate. We are raising our F2013 revenue estimate to $602.4mm from $572.9mm. We model snowmobile sales declining slightly next year and strong growth in off road and PG&A sales. We note that if the Wildcat side by side has high demand that our estimates may prove conservative. Management raised F2012 EPS guidance to $1.60-$1.70 from $1.10-$1.15. We raised our F2012 and F2013 EPS estimates to $1.66 and $2.15, respectively, from $1.24 and $1.79. Our new F2012 EPS estimate is near the mid-range of management s guidance. We are raising our price target to $37 from $30. We derive our new $37 price target by applying a 17x multiple to our new F2013 EPS estimate of $2.15. Our valuation methodology is unchanged, but we think an argument can be made for a higher multiple given the company s extraordinary earnings growth. INVESTMENT THESIS We are reiterating our BUY rating. We are encouraged by the strong 3Q:12 results and management s raised guidance. We think the momentum in F2012 can continue into F2013 with strong demand for ACAT s products. We note that current results have minimal impact from the new Wildcat side by side which we think could add significantly to 4Q:F12 and F2013 results. We continue to take a cautious approach in our model, but find the earnings growth very attractive. Trading at approximately 13.4x our new F2013 EPS estimate we think the shares are cheap. With a clean balance sheet and improving cash flow, and strong earnings growth we are reiterating our BUY rating. Feltl and Company Research Department Arctic Cat Inc. (ACAT) Page 2

3 Arctic Cat Income Statement Mar-10 Fiscal Year Jun-10 Sep-10 Dec-10 Mar-11 Fiscal Year Jun-11 Sep-11 Dec-11 Mar-12 Fiscal Year Jun-12 Sep-12 Dec-12 Mar-13 Fiscal Year $ in thousands except per share amounts Q4 A 2010A Q1 A Q2 A Q3 A Q4 A 2011A Q1 A Q2 A Q3 A Q4 E 2012E Q1 E Q2 E Q3 E Q4 E 2013E ATV sales 55, ,953 27,833 56,641 48,559 48, ,050 37,899 58,789 54,432 64, ,559 42,447 65,844 59,766 67, ,395 Snowmobile sales ,918 17,105 91,525 77,822 (4,487) 181,965 17, , ,227 (5,205) 252,053 17, , ,087 (3,357) 250,848 PG&A sales 27,580 99,857 18,468 27,646 25,595 29, ,636 19,670 31,370 27,363 30, ,629 20,693 33,284 29,388 32, ,130 Revenue 84, ,728 63, , ,976 73, ,651 74, , ,022 89, ,241 80, , ,241 96, ,373 Cost of Sales Snowmobile and ATV 60, ,217 42, , ,723 48, ,783 49, , ,541 61, ,524 53, , ,891 65, ,275 PG&A 16,020 58,275 10,398 17,274 14,521 18,166 60,359 11,526 18,837 16,704 18,257 65,324 12,085 19,904 17,251 19,659 68,898 Cost of Sales 76, ,492 52, , ,244 66, ,142 60, , ,245 79, ,848 65, , ,142 85, ,173 Gross Profit 7,896 83,236 10,759 51,258 32,732 6, ,509 14,275 57,149 47,777 10, ,394 15,504 61,410 49,100 11, ,200 Gross Profit Margin 9.4% 18.5% 17.0% 29.2% 21.5% 9.2% 21.8% 19.1% 27.9% 23.1% 11.4% 22.5% 19.2% 28.1% 23.8% 11.6% 22.8% Selling and Marketing 8,947 33,929 6,287 10,405 8,502 8,567 33,540 6,085 12,160 10,186 8,588 37,019 6,493 12,249 10,621 9,675 39,038 Research and Development 3,749 12,926 3,225 3,185 3,418 5,201 15,029 4,002 3,821 4,773 4,965 17,561 4,315 3,937 4,950 4,789 17,991 General & Administrative 7,722 35,045 8,152 10,287 8,595 7,550 34,805 7,784 8,245 6,635 8,051 30,715 8,146 8,749 7,734 8,823 33,453 Total Operating Expenses 20,418 81,900 17,664 23,877 20,515 21,318 83,374 17,871 24,226 21,594 21,605 85,296 18,954 24,935 23,305 23,287 90,482 Operating Income (12,522) 1,336 (6,905) 27,381 12,217 (14,558) 18,135 (3,596) 32,923 26,183 (11,412) 44,098 (3,450) 36,475 25,794 (12,100) 46,719 Operating Margin -14.9% 0.3% -10.9% 15.6% 8.0% -19.8% 3.9% -4.8% 16.1% 12.6% -12.8% 7.7% -4.3% 16.7% 12.5% -12.5% 7.8% Interest Income Interest Expense (1) (250) (3) (7) (1) 0 (11) (2) (4) (1) (2) (9) (2) (1) (1) (2) (6) Pretax Income (12,515) 1,098 (6,890) 27,400 12,244 (14,523) 18,231 (3,573) 32,939 26,205 (11,388) 44,183 (3,424) 36,503 25,825 (12,067) 46,837 Income Tax (2,955) (777) (2,412) 9,591 2,982 (4,937) 5,224 (1,251) 11,529 9,177 (3,986) 15,469 (1,199) 12,776 9,039 (4,224) 16,393 Tax Rate 23.6% -70.8% 35.0% 35.0% 24.4% 34.0% 28.7% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% Loss from discontinued operations Net Income, Common (9,560) 1,875 (4,478) 17,809 9,262 (9,586) 13,007 (2,322) 21,410 17,028 (7,402) 28,714 (2,226) 23,727 16,786 (7,844) 30,444 Fully Diluted Common EPS (0.52) 0.10 (0.25) (0.52) 0.70 (0.13) (0.60) 1.66 (0.17) (0.59) 2.15 EPS Growth Rate -43.3% % -24.7% 20.0% 249.3% -0.1% 584.4% -48.2% 18.0% 85.4% 13.5% 136.6% 36.7% 48.3% 28.4% -0.1% 29.6% Diluted Shares Outstanding 18,228 18,291 18,191 18,320 18,644 18,289 18,539 18,220 18,668 18,489 12,440 17,300 12,775 13,950 14,200 13,200 14,150 EBITDA (8,744) 24,115 (4,286) 33,006 17,010 (11,779) 33,951 (1,208) 36,423 29,683 (7,912) 56, ,025 29,344 (8,550) 60,919 Feltl and Company Research Department Arctic Cat Inc. (ACAT) Page 3

4 Analyst Certification I, Mark E. Smith, certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation related to the specific recommendations expressed in this report. Important Disclosures: The analyst or a member of his/her household does not hold a long or short position, options, warrants, rights or futures of this security in their personal account(s). As of the end of the month preceding the date of publication of this report, Feltl and Company did not beneficially own 1% or more of any class of common equity securities of the subject company. There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of. The analyst has not received any compensation for any investment banking business with this company in the past twelve months and does not expect to receive any in the next three months. Feltl and Company has not been engaged for investment banking services with the subject company during the past twelve months and does not anticipate receiving compensation for such services in the next three months. Feltl and Company has not served as a broker, either as agent or principal, buying back stock for the subject company s account as part of the company s authorized stock buy-back program in the last twelve months. No director, officer or employee of Feltl and Company serves as a director, officer or advisory board member to the subject company. Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months. Strong Buy: The stock is expected to have total return potential of at least 30%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels. Buy: The stock is expected to have total return potential of at least 15%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive. Hold: The stock is expected to have total return potential of less than 15%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding. Sell: Expect a negative total return. Current positions may be used as a source of funds. Feltl and Company Research Department Arctic Cat Inc. (ACAT) Page 4

5 1/26/2012 Ratings Distribution for Feltl and Company Investment Banking Number of Percent Number of Percent of Rating Stocks of Total Stocks Rating category SB/Buy 43 68% 3 7% Hold 18 29% 0 0% Sell 2 3% 0 0% % 3 5% The above represents our ratings distribution on the stocks in the Feltl and Company research universe, together with the number in (and percentage of) each category for which Feltl and Company provided investment-banking services in the previous twelve months. 10/25/11 Buy Target: $21 10/27/11 Buy Target: $23 12/28/11 Buy Target: $30 1/26/12 Buy Target: $37 Date Nature of Report Rating Price Target 10/25/11 $16.63 Buy $21 10/27/11 Raise Price Target Buy $23 12/28/11 Raise Price Target Buy $30 01/26/12 Raise Price Target Buy $37 Feltl and Company does make a market in the subject security at the date of publication of this report. As a market maker, Feltl and Company could act as principal or agent with respect to the purchase or sale of those securities. Feltl and Company Research Department Arctic Cat Inc. (ACAT) Page 5

6 Valuation and Price Target Methodology: We derive our $37.00 price target by applying a 17x multiple to our 2013 EPS estimate of $2.15. Risks to Achievement of Estimates and Price Target: Arctic Cat s business may be impacted by consumers discretionary spending and confidence. Macroeconomic factors such as increasing gasoline prices, unemployment and generally tough economic times may negatively impact consumers retail spending. Changing consumer outdoor trends could also have a negative impact on sales. Changing weather may slow sales for ACAT as this could have a negative impact on demand and sales. Higher commodity prices may affect earnings. Aluminum, steel and plastic are large components of the products ACAT produces. Higher transportation and energy related costs can also have negative impacts on ACAT s earnings. The retail business is extremely competitive and competition for customers through lower prices may negatively impact ACAT s returns. Discounted prices at ACAT s largest competitors may cause the company to lower prices to maintain its market share and increase margin pressure. Unfavorable exchange rates could have a negative effect on sales and net earnings. Retail credit market deterioration and volatility may restrict the ability of Arctic Cat s retail customers to finance the purchase of Arctic Cat products. The company is dependant on its dealers, suppliers and financial sources. Any disruption that could affect their businesses could have an adverse affect on their relationship with Arctic Cat. Governmental regulation due to safety and environmental issues could require Arctic Cat to incur expenses or modify products to comply with the new regulations. Readers should recognize that the risks noted here do not represent a comprehensive list of all risk factors or potential issues, nor all factors that may preclude achievement of our forecast or price target. Additional risk factors exist and are outlined in the Company s SEC filings Other Disclosures: The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results. Additional information is available upon request. Feltl and Company Research Department Arctic Cat Inc. (ACAT) Page 6

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