Vista Outdoor: Still Muddling Along (NYSE:VSTO)

In August of last year, I believed that Vista Outdoor Inc. (NYSE:VSTO) was fishing for deals ahead of its separation, adding another deal to its M&A streak. Believing that prevailing earnings multiples were low, I feared that leverage could become an issue if peak profitability would revert, and this made me mindful of the risks despite the optics of a lower prevailing earnings multiple.

Over the past year, shares have seen remarkable little volatility, as earnings have come down, but so has leverage, with the company preparing for the split-up of the business.

A Recap

Vista Outdoor Inc. pursued a string of deals in the late 2010s, placing the company into a tough situation ahead of the pandemic. For the year 2019, the company posted an 11% fall in sales to $2.0 billion as an EBITDA number of $137 million worked down to a 5 times leverage ratio.

With operating conditions being dismal and leverage being high, all options were on the table, as shares traded at just single digits. The pandemic provided a lifeline with demand for ammunition and outdoor sports goods on the rise. Revenues rose to $2.2 billion in 2021 as the company posted a huge profit of $272 million, equal to $4.50 per share (with the earnings power being largely equal to the prevailing share price pre-pandemic).

With leverage coming down rapidly, the company made a few deals, including a $474 million acquisition of Foresight Sports in 2021, placing the company on track to post around $3 billion in sales and $7 in earnings per share. Optimism meant that shares peaked at around the $50 mark in 2022, as earnings power trended at $8 per share in the fiscal year 2022.

For 2023, the company guided for sales to increase further to $3.2 billion, albeit that earnings were seen at $7.00-$7.75 per share, with some of the peak margins reverting. The company furthermore announced its intention to separate the outdoor products from the sporting segment.

The company announced another $540 million deal for Fox Racing in July 2022, as shares had fallen to the $27 mark by that time already. Net debt would increase to $1.2 billion following this deal, as the own enterprise valuation was non-demanding, raising the question if money had not been better spent on buybacks instead of pursuing a relative expensive deal.

With earnings power at $7 per share, the 4 times multiple looked non-demanding, but I feared leverage in case of normalization of margins, certainly a concern as the company announced a $192 million deal to acquire Simms Fishing Products over the summer as well.

Trading Stagnant

Since last summer, shares of Vista have seen relatively little volatility, having traded in a $24-$30 range for pretty much all over the past year. In November of last year, the company posted second quarter results as the company trimmed the full year sales guidance to $3.1 billion, with earnings per share (adjusted) now seen at $6.00-$6.50 per share, with the guidance being trimmed further in the third quarter.

In March of this year, the company posted its fiscal 2023 results, with full year sales up a percentage point to $3.08 billion. The company posted a small GAAP loss on the back of a $374 million impairment charge with adjusted earnings per share down 23% to $6.40 per share. Fortunately, the company managed to reduce net debt below the billion mark, at $963 million, as adjusted EBITDA still came in at $622 million, alleviating the worst leverage concerns.

This comes as the company expects a further normalization of results with 2024 sales seen at a midpoint of $2.90 billion, EBITDA seen at just over half a billion and earnings seen between $4.50 and $5.00 per share. This came as the company is still working to separate the business in anticipation of the spinoff of the company into a $1.5 billion Sporting Product business, which is expected to post EBITDA margins in the mid-twenties.

The second business is a $1.4 billion Outdoor Product sales business with margins seen in the low teens, very disappointing as many acquisitions in recent years have been earmarked to boost the overall business away from the sporting business which is the most lucrative business, largely tied to ammunition sales.

A Bit More Upbeat

Forwarding nearly a year in time, we have seen a profit reversion in the fiscal year 2023 (largely coinciding with calendar year 2022) as the 2024 outlook is softer, but still resilient. With net debt coming down, relative leverage ratios appear intact, but the truth of the matter is that the fundamental capital allocation is very poor.

After a near bankruptcy in 2019, we have seen Vista spend a collective $1.2 billion on three deals in relatively recent times (post-pandemic). They are part of the Outdoor Product business, which is responsible for merely a quarter of profitability here (or even less). This comes as all of Vista Outdoor currently commands an enterprise valuation of just about $2.5 billion, indicating that the company grossly overpaid for these assets, as the segment even includes some legacy businesses as well.

Given this, I find myself performing a balancing act. Vista Outdoor trades at non-demanding multiples of 5-6 times earnings, even if earnings are down substantially from the peak as well and leverage seems in check.

There furthermore is the upcoming spinoff, which might create value, but will likely create some uncertainty as well, as I am not comforted by the capital allocation of the business here (spending too much in the good times, while facing difficulties in tougher times). Given all this, I consider Vista Outdoor Inc. share largely fairly valued, although I look forward with great interest to potentially get involved around the spinoff.