22% Bah, Humbug – Vista Has More Potential (NYSE:VSTO)

In my last article about Vista Outdoors (VSTO), I laid out the case for outsized growth from this small-cap name. With a recent buy rating by an analyst at Cowen, and the large 22% surge in stock price… is there any more room to run for Vista? Let’s answer that in as quick an article as possible…

What Does Vista Do?

Vista Outdoor makes lots and lots of outdoor products… Giro bike helmets, Bushnell golf rangefinders, Camelback water bottles, Camp Chef outdoor cooking products, and … oh yes, ammunition. Lots and lots of ammunition. If you are looking at how many brands, you can see my previous article on Vista where I believe I make it clear just how dominant a portion of business the ammo market is for Vista. But in general, Vista brings in roughly 60-65% of its revenue with ammunition for firearms. This is not everyone’s cup of tea, but this business is highly profitable… especially at the current time.

Image Source: Vista Outdoor Website

Even though the outdoor brands Vista owns are all well respected in their industries, the focus on ammunition is what should have everyone’s attention. Ammunition sales have been increasing at a rapid pace, and manufacturers are having trouble keeping up with demand. The demand will eventually subside, but it appears not for quite a while. (Last time this boom and bust industry had high demand, it was at lower levels and it lasted 3-4 years!) With a likely Democrat-led administration coming into power in the United States, we can assume that demand will be high for a while.

Recent Q2 2020 guidance showed that management expected $495 to $515M during the current quarter of sales. This is roughly $500 Million is sales for a company that is only valued at $1.2B in total… and this sales number is for the upcoming quarter. This is part of the reason for one analyst to upgrade Vista to buy – and this single upgrade likely moved Vista 22% today. (Roughly 5.48M shares purchased, for a stock that usually sees 1-2 million shares changing hands.)

(Source: Earning Presentation, Slide 7. Highlights added)

As mentioned nearly two months ago, this increase in sales is expected even as they plan to reduce debt levels… something they should have no trouble with considering current sales. On top of these sales, Vista is likely pushing to get production started, tested and then ramped up on the newly purchased Remington assets… including some modern tooling for 9mm ammunition, the most popular caliber on the market.

Record price increases have not slowed demand either, as a typical 100 rounds of 9mm would have cost about $20-24 6-9 months ago and today you would be lucky to find them for $60! This is a three-fold price increase that has not slowed down demand. We can expect that demand to stay high as NSSF has shown that millions of new folks are buying firearms… and all of those millions will need ammunition if they intend for the newly bought firearm to be anything but a paperweight.

NSSF Reports Record New Consumer Demand

The NSSF represents the firearms industry. It also reports on what it sees happening within the industry. On top of a steady increasing – yes, increasing – acceptance of firearms in the United States, the NSSF compiles figures for the industry including voluntary surveys of purchasers. They state that of the 17.2 Million firearms purchased in the U.S. in the first ten months of 2020, “Nearly 7 million of those are estimated to be first-time buyers.” (source) On top of Gallup’s estimate that some 32% of Americans may own a firearm, the newest 7 million folks need ammunition too… and ammunition is a consumable purchase for a firearm. This means people will be coming back to purchase Vista’s products over and over again. (Vista already mentioned a $1Billion dollar backlog about two months ago!)

This is just a tiny reason why Chris Metz (CEO) stated this gem in the earnings conference call…

“We are on the forefront of what we believe is a long-term resurgence in outdoor recreation. We also believe Vista is perfectly situated to capitalize on these trends with our market-leading brands and the transformation we have made.”

Source: Q1 Earnings Call (August 9, 2020) Emphasis added

Possible Issues

Point #1: As with any firearm related company, there is risk of outright bans on products or the removal of the second amendment. Though highly unlikely to kill the industry entirely, the expected Biden administration is likely to push that direction.

Argument to #1: The NRA and NSSF still have some pull, amongst other second amendment organizations. They are likely to fight any restrictions aggressively. Even if pushed through, any restrictive laws would likely take time to introduce. In the meantime, consumers would buy everything they could and raise prices to even more astronomical heights.

Point #2: Debt. Vista still has a good portion of debt, namely $413 Million as of its Q1 earnings call. For a $1.2 Billion dollar company, this is a high amount of debt.

Argument to #2: Last quarter Vista paid off $73 Million in debt even while increasing overall Free Cash Flow. Less than a year from now, if trends continue, they could be debt free without any real risk to profitability or FCF.

Point #3: Increase in Costs. An increase in material costs is the most likely option, as the dollar will likely decline in value against the price of copper, which is used to make brass. (Brass is used in ammunition.) Since Vista makes the powders that go into their ammunition, they would then be looking at chemical and other material price increases.

Argument to #3: Vista was profitable selling 9mm at $20 for 100 just 9 months ago. Passing on manufacturing cost increases would be quite simple and since folks are already paying $60 for that same 100 rounds, this again seems an unlikely weakness.

Point #4: Demand Crash. Price increases, supply glut, etc. could reduce demand for 65% of Vista Outdoor’s business.

Argument to #4: A crash in demand is unlikely for an industry that has announced a nearly 20% increase in brand new consumers. This is tech-like astronomical growth and any political or societal uncertainty is likely to increase sales, rather than diminish them.

The Gift for 2021

Vista Outdoor stock has been punished by sellers and shorts after a quick increase from March lows. It appears many people were on the sidelines waiting for a catalyst – aside from the sheer record numbers of sales. Shorts could bring Vista back down to the $20 range, but they are unlikely to hold it down long as results for the next quarter are expected in early February.

Aside from the recent Cowen upgrade, B. Riley speculated that Vista Outdoor had a 50% upside when it was trading at $22. They have a current price target of $33, the same as Cowen’s price target.

Vista Outdoors still trades at a Forward PE ratio of 7.84. It has increased gross profit by roughly 40% for the last few quarters, debt is going down quickly and a nearly 200% EBITDA increase aided last quarter – which is a typical capital-intensive quarter. These numbers put Vista Outdoor above most highly flying tech stocks and though I would not suggest a PE ratio of 30 would happen, even an increase to a PE ratio of 15 would give amazing amounts of green in your portfolio.

Expect short term fluctuations in all directions, as this is not a stock for the faint of heart… but overall you can expect a strong uptrend for VSTO for at least 2-6 more months, and likely much longer. While Sturm, Ruger (NYSE:RGR) and Smith & Wesson (NASDAQ:SWBI) are holding this same trend… only Vista is making consumable products into this massive market opportunity.

Disclosure: I am/we are long VSTO, SWBI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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