BMO Upgrades Arctic Cat, But Warns 2020 Guidance Is Unrealistic

• Arctic Cat Inc ACAT shares have declined 42.02 percent over the past six months, hitting a low of $16.64 on October 22.
• BMO Capital’s Gerrick L. Johnson has upgraded the rating on the company from Underperform to Market Perform, with a price target of $20.
• While the upgrade is based on valuation, Johnson expressed concern regarding the “unrealistically high” guidance for FY2020, especially given the recently reduced FY2016 guidance.

Analyst Gerrick Johnson expressed concern about Arctic Cat’s management continuing to support the 10.5 percent compound annual sales growth guidance for FY2020, along with a 10 point gross margin increase through 2016-2020.

The company also reported its 2Q16 EPS below the estimates and the consensus. The stock has reacted negatively to the Q2 miss and the lowered FY2016 guidance, and Johnson believes that “investor expectations are sufficiently low enough to account for continued fundamental challenges.”

However, the company bought back a significant amount of shares on October 23, which Johnson sees as a sign of confidence, despite the industry outlook worsening.

“This may be a sign of confidence in the company’s 2020 outlook or, perhaps, simply a sign that management expects the shares to go higher,” the BMO Capital report stated.

This also indicates increased possibility that management might look to sell the company “as a profitable exit strategy.”