Tuesday, April 9, 2019

Vista Outdoor

Shares of Vista Outdoor have been decimated as the company has been dragged through a deep industry slowdown. Shares are down 80% from their highs in 2016.

VSTO sells a range of outdoor sporting goods like helmets, goggles, guns etc, but they make most of their money selling ammunition. The gun/ammunition industry is currently undergoing a downturn. During the Obama years, gun enthusiasts were scared of regulation and stocked up. So now there has been a big inventory overhang which has reduced production (which hurts manufacturers like VSTO who have large fixed costs) and at the same time reduced prices.

Previous management of VSTO was replaced a few quarters ago, and new management has focused on a few things that have improved the company's potential, in my opinion. They have sold and are selling businesses in which VSTO is not a top player, they are cutting costs and improving manufacturing processes to improve the efficiency of production, and they have pushed debt maturities further out. Any cash flow proceeds have been applied towards debt, much of which is not due until 2023.

Earnings excluding one-time costs are now back in positive territory even though the industry remains in a downturn. Once customer/consumer inventory levels return to normal (and its hard to say when this might be, and this uncertainty is undoubtedly leading to at least part of the poor valuation by Mr. Market), I expect a lot of the gains will fall straight to the bottom line. Prior to losses in 2018, operating income was as high as $242 million in 2017, while today's market cap is just $480 million with net debt of $900 million.

The company expects to sell its gun-making non-core asset for $200 million+ and apply the proceeds to debt, which would reduce net debt to less than $700 million. Considering the oligopolistic nature of the industry (especially with respect to commercial ammunition sales to police/military), VSTO trades at an attractive multiple to its earnings power in my opinion.

Disclosure: Author has a long position in shares of VSTO

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