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VSTO - Vista Outdoor


mateo999
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Has anyone looked at the upcoming spinoff from ATK prior to its merger with ORB (aka Vista Outdoor)?  Thoughts as to synthetically creating VSTO shares @ $52 pre-spin via a paired trade?

 

EDIT 1/7/15: ATK announced last night that 2 VSTO shares will be distributed for every 1 ATK share held.  Hence the price at the time of writing was $26/share.

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  • 3 weeks later...

This is incredibly cheap both in absolute and relative terms.  I peg it at less than 9x FCF on what I believe are conservative forward estimates, and for that price you get the #1 player in a consolidated ammunition industry and which will spin with less than a turn of leverage.  You can lock this in by buying 1 ATK and shorting (1/.449), or approximately 2.2272, shares of ORB.  The post "surge" in demand is more than priced in at this price imho.

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I think those are well known issues  and FY16 isn't so far out seeing as FY15 is wrapping up in 2 months.  Also, *organic* growth to return in 2H 16, not overall growth. Will spin with less than a turn of leverage for a significantly free cash flow generative business that has said they're certainly open to buying back shares. Trading in line with a gun maker. Less than 10% of sales are guns. 

 

There have got to be better short candidates out there than VSTO, no?  Let me frame the question differently: what  P/FCF multiple do shares need to fall to for this to be a long, or at least not a short?

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I think those are well known issues  and FY16 isn't so far out seeing as FY15 is wrapping up in 2 months.  Also, *organic* growth to return in 2H 16, not overall growth. Will spin with less than a turn of leverage for a significantly free cash flow generative business that has said they're certainly open to buying back shares. Trading in line with a gun maker. Less than 10% of sales are guns. 

 

There have got to be better short candidates out there than VSTO, no?  Let me frame the question differently: what  P/FCF multiple do shares need to fall to for this to be a long, or at least not a short?

 

Mateo - I get the hunch that management is being rosy about the draw-down. Not saying it's a short now but I think event-funds bid it up big time into when-issued.

The setup for a short will come...but not yet. Will do a short write-up.

How do you handicap the 2016 presidential election downside?

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I think those are well known issues  and FY16 isn't so far out seeing as FY15 is wrapping up in 2 months.  Also, *organic* growth to return in 2H 16, not overall growth. Will spin with less than a turn of leverage for a significantly free cash flow generative business that has said they're certainly open to buying back shares. Trading in line with a gun maker. Less than 10% of sales are guns. 

 

There have got to be better short candidates out there than VSTO, no?  Let me frame the question differently: what  P/FCF multiple do shares need to fall to for this to be a long, or at least not a short?

 

I don't think it's a short. It seems as if a number of recent spin-offs have stumbled out of the gate and I'd like to give this one some time post-spin. While I think the long-term outlook is good, I've seen a number of analysts with $340m+ EBITDA targets for FY15 which I think is overly optimistic. So for me, I'd like to see a quarter as a standalone company.

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There you go. Bid-up big time into regular way. I'm still skeptical and I can almost guess who's buying this stock.

We will see. Mgmt @ NYC this Friday hosting a lunch and probably provide another update in Mid-Feb. My guess is they already have acquisitions up-their-sleeves. I wonder how well the math will work out as a 6-7x Co buying 10x businesses.

We will see. They do throw off a lot of cash that helps shield the downside, but I would rather not make this $$$ due to the uncertainty around ammo.

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I think those are well known issues  and FY16 isn't so far out seeing as FY15 is wrapping up in 2 months.  Also, *organic* growth to return in 2H 16, not overall growth. Will spin with less than a turn of leverage for a significantly free cash flow generative business that has said they're certainly open to buying back shares. Trading in line with a gun maker. Less than 10% of sales are guns. 

 

There have got to be better short candidates out there than VSTO, no?  Let me frame the question differently: what  P/FCF multiple do shares need to fall to for this to be a long, or at least not a short?

 

Just saw this. think $280 mm EBITDA @ 7x is about right.So maybe $28-30 / share. I would rather long it after the shoe dropped. Wish I saw it when stock was trading @ 25. Would have definitely owned it despite all these concerns.

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Just saw this. think $280 mm EBITDA @ 7x is about right.So maybe $28-30 / share. I would rather long it after the shoe dropped. Wish I saw it when stock was trading @ 25. Would have definitely owned it despite all these concerns.

 

If we start with your 280 assumption, and annualize Q3 revenue (which mind you, was already down 13% from yr ago levels), that implies EBITDA margin compression of 223bps from FQ3 levels which I find unrealistic.  Jan NSSF adjusted NICS checks were up 8.4% y/y.  4th consecutive Q of y/y increases.  I think the bottom isn't as scary as you think.

 

As for the 7x on close to trough forward ebitda, that's overly punitive in my estimation.  This is a company that is a leader in a high roic business with long term tailwinds (despite some bumps along the way), is taking share because they work with customers better than their peers and have better distribution, a great B/S, and that requires 1.5-2% of sales in capex.  It just happens to be cyclical. So what?

 

OLN, SWHC, and RGR trade for 6.64x, 6.94x, and 7.4x next 4Qs EBITDA respectfully according to BB consensus ests.  VSTO is a better business than each of them, so again, i wouldn't short based on a 7x multiple.

 

Further if they were to lever up to their target leverage ratio of 2.5-3x to simply repurchase shares, accounting for increased interest rate on new debt, and even compressing the P/E multiple somewhat, where should shares trade?  I can still see significant upside from this financial engineering alone (though there may be restrictions on the amount able to be bought back given it's a spin as part of a morris trust, company has said buybacks are on the table).

 

Everything's a short at some price.  I would argue we're not there yet with VSTO (though a few more weeks like this past week might get us there).

 

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Just saw this. think $280 mm EBITDA @ 7x is about right.So maybe $28-30 / share. I would rather long it after the shoe dropped. Wish I saw it when stock was trading @ 25. Would have definitely owned it despite all these concerns.

 

If we start with your 280 assumption, and annualize Q3 revenue (which mind you, was already down 13% from yr ago levels), that implies EBITDA margin compression of 223bps from FQ3 levels which I find unrealistic.  Jan NSSF adjusted NICS checks were up 8.4% y/y.  4th consecutive Q of y/y increases.  I think the bottom isn't as scary as you think.

 

As for the 7x on close to trough forward ebitda, that's overly punitive in my estimation.  This is a company that is a leader in a high roic business with long term tailwinds (despite some bumps along the way), is taking share because they work with customers better than their peers and have better distribution, a great B/S, and that requires 1.5-2% of sales in capex.  It just happens to be cyclical. So what?

 

OLN, SWHC, and RGR trade for 6.64x, 6.94x, and 7.4x next 4Qs EBITDA respectfully according to BB consensus ests.  VSTO is a better business than each of them, so again, i wouldn't short based on a 7x multiple.

 

Further if they were to lever up to their target leverage ratio of 2.5-3x to simply repurchase shares, accounting for increased interest rate on new debt, and even compressing the P/E multiple somewhat, where should shares trade?  I can still see significant upside from this financial engineering alone (though there may be restrictions on the amount able to be bought back given it's a spin as part of a morris trust, company has said buybacks are on the table).

 

Everything's a short at some price.  I would argue we're not there yet with VSTO (though a few more weeks like this past week might get us there).

 

Mateo999,

Fair points. Let me try to address them one by one. All said, I should have bought it when I first looked at it around $30. The bull-thesis is a very good one and super easy to get behind. Congratulations – it’s been a very good investment so far.

 

- NICS checks is indeed a positive, but from the SHOT show it is evident that major gun companies are discounting heavily to move the elevated inventory. It’s a healthier industry dynamics – yet I think the positive impact will not be felt by VSTO for at least 2-3 quarters given historical experience. But you are right, gun sales in volume seems to be rebounding.

- I model drastic margin compression because I know that VSTO’s ammo plants are operating at 110% capacity w/ added shifts. The gross margin is a few points above historical (2012 and before), and they are had taken price the last few quarters. Given the fixed cost industrial nature, I believe when and if the tide turns ugly, the operating-deleverage is massive. I do not believe this is unrealistic.

- The key question then is whether the demand volume will turn down 40%. Frankly I don’t know for sure, but it really boils down to whether red-neck’s irrational stockpile behavior is gonna stop. I don’t really have a good answer yet.

- I’m using 7x because EBITDA, in my opinion, is actually peak and way above “normalized” levels. The secular tail-wind you speak of might be ~10% CAGR, but note for AMMO it had been 15-20%. You can argue that the over-stocking is a permanent consumer behavior, but I am skeptical of that.

- These Gun companies were at 5-7x for a while. The sell-side is almost one-sidedly bullish – and it’s the same group that were wrong in the downturn in early 2014.

- About levered buy-backs, it’s a very fair point. It remains a risk to my thesis. But these guys want to build empires (rightfully so) and are gonna go out there and buy sports stuff at 9-10x. The financial engineering is pretty neutral there if you run the numbers.

- They are indeed gaining share from my checks, and their sports portfolio is very extensive. Frankly, I doubt consumer behavior changes (if not get more trigger-happy) before the presidential election. So maybe I really should have bought some shares…hindsight is 20/20

 

With all that said, I'm inclined to be buyer at $30 given what I know so far -- assuming what gets it there isn't my bear thesis. Let me know how I'm wrong.

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Thank you for the kind words.  I appreciate the back and forth because I think maintaining intellectual honesty and hearing other opinions is the best way to weed out false senses of security.  I also enjoy your blog, so thanks for that.

 

Every one of your points is fair, and I certainly like shares less at 38 than I did at 26.  Just a few things I wanted to note:

 

As for the underlying cause in rebounding adj. NICS checks, except as it pertains to the <10% of long gun exposure, VSTO shouldn't really care about the price points guns are being sold at.  Right??  Heck, maybe with the few $ the buyer saved he or she could buy an accessory or another box of ammo.  Or a trail camera which I (a non shooter) am going to get for home security purposes.  Another knock on NICS checks is that it includes used gun sales and thus doesn't add to installed base.  True.  But I'm guessing in the aggregate, a used gun being purchased will probably be better utilized by the buyer than it was by the seller.

 

As for the plant utilization, perhaps rimfire is the other shoe to drop, but the .223 and 5.56 which has been the largest source of volume declines is being sourced from OA going forward, so it shouldn't really be VSTO's fixed overhead absorption problem to deal with (at Lake City).  Also generally speaking, ATK/VSTO gave some color on its November (post ORB/Antares blowup) call regarding the improved cost structure at VSTO plants today given SKU rationalization and plant efficiencies vs. prior periods.  So I don't think trough margins are structurally going to be at or below those in past troughs.  That said, maybe my EBITDA figure will prove to be too rosy.  I still think 7x for such a capital light business is too low.

 

One thing I find interesting here is how focused most are to the downside of post-surge.  What about risks to the upside?  In some way, I sort of view VSTO as a hedge against horrific events occurring in the US (i.e. some gun nuts I talk to think ISIS is inevitably coming stateside).

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I think with the stock up 30%+ in the last month buybacks are probably off the table at $40.  The stock is getting bid up today on what is really not a lot of volume (1.4mm shares thus far). 

 

At this point its gone from being an undervalued special situations type play to a "do you believe in the story" play.  I think DeYoung chose VSTO for a reason, outdoor products is a fragmented market, and there is probably to surprise to the upside on ammo sales.  All of that being said, there is a lot of execution risk with acquisitions. 

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Gray Fox (or anyone else), in lieu of buybacks, do you get the sense the company is likely to announce an acquisition within a few months?  I think management now realizes the difficulties in acquiring businesses with some cyclicality and trust they will sharpen their pencils accordingly going forward.  Let alone forthcoming analyst coverage which will likely create demand for shares, I think the potential for accretive deals is what will ultimately keep shorts out of this name at the moment.  Ultimately I think we still have decent upside from here.

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Gray Fox (or anyone else), in lieu of buybacks, do you get the sense the company is likely to announce an acquisition within a few months?  I think management now realizes the difficulties in acquiring businesses with some cyclicality and trust they will sharpen their pencils accordingly going forward.  Let alone forthcoming analyst coverage which will likely create demand for shares, I think the potential for accretive deals is what will ultimately keep shorts out of this name at the moment.  Ultimately I think we still have decent upside from here.

 

I would honestly hope they focus on running as lean as possible as a stand-alone enterprise, tidy up whatever is left to do from the Bushnell acquisition, and hold off on any acquisitions for the time being.  I think the logical acquisitions are in fishing/camping.  I can't see them doing anything huge in the guns/ammo space at this time.  Winchester would be too big, have serious regulatory issues, and I don't think OLN is interested in selling.

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  • 3 weeks later...

The investment has worked out phenomenally well thus far (~65% in a few months) but I think there is still upside.  Should a thoughtful acquisition be announced, VSTO is poised to do very well.  Some thoughts:

  • RGR and SWHC have done well.  Investor appetite in the space seems to be getting bigger.
  • Commentary from DKS, CAB, and SPWH isn't too scary (for instance DKS insinuated yesterday ammo was comping positive)
  • February adjusted NICS were up slightly y/y
  • Yesterday CRT initiated on VSTO with a $55 target and the note is actually thoughtful
  • The company announced a $200mm buyback to be deployed opportunistically
  • And maybe the biggest short term driver could be the ATF's proposal to ban the production of (but not possession of) commercial 5.56mm ammunition (currently in public comment phase).  Already 5.56 is flying off store shelves, and I think there may be some opportunity for increased pricing to retailers.  I also believe there's some ability for VSTO to get extra supply from OA on these calibers.  Longer term, if the ban goes through, it's likely a net negative, though if that's the case, it's very nice to know the manufacturing assets associated with 5.56mm (which would then likely be impaired) are now with OA and there's no take or pay agreement (or anything of that nature)

 

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My understanding is that the ATF only wants to ban 5.56mm armor piercing rounds.  My guess is that the chances of the ban going through are slim, and even if it did people would only buy more of other types of 5.56mm/.223 ammo.

 

There is a very strong reaction to any type of legislative threat in terms of firearm and ammo demand.  There is also little actual legislative risk.  The NRA has done an incredible job of convincing people that the "jack booted government thugs" are at their doorstep when in reality a gun control bill didn't even see the House floor for a vote following Newtown.

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My understanding is that the ATF only wants to ban 5.56mm armor piercing rounds.  My guess is that the chances of the ban going through are slim, and even if it did people would only buy more of other types of 5.56mm/.223 ammo.

 

There is a very strong reaction to any type of legislative threat in terms of firearm and ammo demand.  There is also little actual legislative risk.  The NRA has done an incredible job of convincing people that the "jack booted government thugs" are at their doorstep when in reality a gun control bill didn't even see the House floor for a vote following Newtown.

 

Yes the round in question has a small steel penetrator and that is part of their logic in classifying it as an armor piercing. In reality nearly any rifle round will penetrate the armor that law enforcement officers wear. I believe the real motive is to ban a source of inexpensive ammunition.

 

 

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Anyone still involved in this? It has been down quite a bit this year especially today with REI pulling their Camelbak and Camping products until they make a statement on the Parkland tragedy.

 

After recent acquisitions it is close to a 50/50 split between firearms and outdoor products. Their two large recent acquisitions to buy Camelbak and a portfolio of outdoor brands like Bell, Bolle and Serengeti were of a dollar amount very similar to todays entire market cap.

 

To me this seems to be a situation where they should take Munger's cancer surgery approach and look for a way cleave off the more controversial aspects of their business.  I don't know how much synergy there is selling bike and ski helmets along with ammo and with the REI news it seems that having the businesses tied together is actually harmful to the company.

 

 

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