Arctic Cat's Stealth Rally: Shares Have Almost Doubled in 2012

Shares of Arctic Cat

have nearly doubled in 2012, rallying from about $20 in January to the current price, around $40 per share. The company has staged the rally on stronger-than-expected earnings. Arctic Cat beat analyst estimates in all four quarterly reports posted in 2012. Most recently, it reported a second quarter earnings per share figure of $1.80 on October 25, beating the $1.79 consensus estimate. Arctic Cat is a Minnesota-based manufacturer of small recreational vehicles: snowmobiles, ATVs and side-by-sides. Concerns about lack of snowfall and limited consumer spending may lead many investors to avoid the small cap. The company also didn't help shareholders with conservative guidance estimates. Back in May, ACAT fell nearly 11 percent in a single session after Arctic Cat cut its guidance for the full-year. Arctic Cat gave cautious guidance again in October, but at least one analyst isn't buying it.

Arctic Cat to Strong Buy last week, calling the company's guidance figures “conservative.” Given the trend, that may prove to be an accurate assessment. Is it too late to catch the move? Arctic Cat is off the highs for the year, but is still up significantly. To be fair, the broader market is up strongly as well, so given the company's small cap status it isn't that surprising. However, management's strategy of under-promising and over-delivering has worked well for shareholders. In addition, many meteorologists have speculated that the upcoming winter would be fairly severe -- in contrast to last year's mild one. That might mean increased demand (and therefore sales) for Arctic Cat's snowmobiles. Obviously, risks remain in terms of the broader market. Concerns about Europe and the fiscal cliff might mean the market takes a dive after the election -- pummelling small caps like Arctic Cat. Further, although some of Arctic Cat's vehicles have commercial use, much of the demand is recreational. If consumer spending is constrained by tepid economic growth, the company's ability to sell high-performance snowmobiles and side-by-sides would be limited.