Vista Outdoor (NYSE: VSTO) Benefits from Demand Boost: Is it Sustainable?

On May 7^th, Vista Outdoor NYSE: VSTO shares plunged more than 25% after the company’s Q4 2020 earnings (VSTO’s fiscal year ends on March 31) disappointed.

But Vista, an ammunition and outdoor sporting goods manufacturer, quickly stabilized and has more than doubled in the two months since.

Following the subpar earnings report, Vista’s outlook has improved considerably, as macro factors have led to soaring demand for ammunition.

Q4 2020 Earnings Report

Vista’s Q4 2020 revenue came in at $426.3 million, down 17.3% yoy and well under consensus estimates of $454.9 million. Shooting sports sales dipped by 21%, while outdoor product sales went down 9%. While the company reported a net loss of $141.2 million, its one-time $156 million impairment charge more than accounts for that loss. Its adjusted earnings per share of 11 cents came in above expectations of 6 cents.

On the impact of the pandemic on business, CEO Chris Metz said:

“COVID-19 pandemic has not impacted all of our channels uniformly. In the fourth quarter, we saw a dramatic shift to online consumer activity and spending as a result of restrictions in place throughout the country. While this presents a significant opportunity for our direct-to-consumer and e-commerce sales, it will present a headwind for our traditional brick-and-mortar retail accounts as well as our network of independent dealers.”

Overall, Vista was a bit pessimistic about Q1 2021 (next quarter), anticipating revenue of $370 to $400 million, below consensus estimates of $471 million. It also expects a loss of 5 cents to breakeven per share, below the consensus estimates of 7 cents per share.

It was a bleak report - there’s no other way to put it. But the news since has been very encouraging for Vista’s stock – even if some of it is negative for the US as a whole.

Macro Factors

An ammunition manufacturer like Vista reacts to news that impacts the demand for guns.

Just before Donald Trump was elected, VSTO was trading at nearly $40 a share, as many expected Hillary Clinton to win the presidency. Clinton was expected to restrict gun ownership, while Trump was expected to protect gun rights. This expectation of a Clinton victory and her expected policy made investors believe that people would rush to buy guns and ammunition, keeping VSTO shares elevated. But after Trump won, the shares began a multi-year downtrend:

Now, with Joe Biden having a massive lead over Trump in the polls, investors are starting to price in a Joe Biden win – and an expected tightening of gun ownership laws. Again, this leads to increasing demand in the present.

On top of a possible change in the presidency, civil unrest across the US is leading to higher demand for guns and ammunition as many believe they need to protect themselves.

The numbers bear all of this out:

The FBI releases background check data every month. In May, checks increased to a little over 3 million, up more than 30% yoy. And the 5-month total for 2020 is up to more than 15 million, also up more than 30% from the same period a year ago. These numbers are historically high, as the 3 million level has only been reached three times in the 22 years that the FBI has released the data. Furthermore, the monthly record was hit this March.

So VSTO is clearly benefiting from the macro environment. But this feels more like a short-term cyclical increase than a sustainable move. The fear emanating from widespread violence is already decreasing as the situation comes under control.

As for the presidency, if Trump wins in November, VSTO stock could quickly move down in response. And if Biden wins, demand will only remain high until a restrictive policy is enacted – or until it becomes clear that it won’t be enacted.

With long-lasting demand increases from the election results and civil unrest seeming unlikely, we should look at the numbers to determine if VSTO is a viable play at current levels.

Valuation

VSTO is trading at around 36x next year’s projected earnings, but at just over .5x sales.

At first glance, these numbers look appealing. But VSTO has seen revenue decrease by more than 11% annualized over the past three years and fall more than 3% annualized over the past five years. EBIT has declined a staggering 45% annualized over the past three years and fallen 32% annualized over the past five years.

Furthermore, while VSTO’s net debt leverage ratio is the lowest it has been since 2018, at 4.3x, it is higher than you’d like to see.

All things considered, Vista deserves a pass. Getting into VSTO now would mean getting into an unhealthy business at a cyclical high.