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Why Vista Outdoor Inc Stock Dropped 29.8% in February

By Rich Smith - Mar 6, 2017 at 11:10AM

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A series of negative announcements have left investors reeling.

What happened

Shares of outdoor sporting goods supplier Vista Outdoor (VSTO 2.40%) have suffered in 2017, with the stock sinking 29.8% last month, over 1% per calendar day. That is on top of the 21.9% decline the company saw in January.

So what

As it turns out, the bad news actually started nearly two months ago, when Vista warned investors in a Jan. 11 press release that it was expecting to record a "material, non-cash intangible asset impairment charge in its Hunting and Shooting Accessories reporting unit," responsible for the company's sales of golf gear, optics, tactical products, and -- most importantly, hunting and shooting accessories.

Vista said that consumers appeared to be shifting their spending away from its products toward "certain firearms platforms outside the Company's firearms offerings" instead. Management feared that this would result in "both revenue and gross margin" declines and prepared investors for the possibility that it would have to take an impairment charge of as much as $400 million to $450 million in its fiscal third quarter (ended Jan. 1).

Management reassured investors that it did "not expect the impairment charge to have any impact on future operations, affect its liquidity, affect cash flows from operating activities, or affect compliance with the financial covenants set forth in its debt instruments." Nevertheless, lawyers quickly began filing lawsuits accusing the company of various (and unspecified) "possible violations of federal securities laws" -- the stock took a one-day hit of almost 22%. 

When earnings finally came out on Feb. 9, and the company confirmed that it had taken an asset impairment of $449 million -- the lawyers filed even more lawsuits. Vista shares went on to suffer another one-day hit of nearly 19%.

Painting of a firing squad.

How many investors reacted to Vista Outdoors' earnings last month. Image source: Getty Images.

Now what

All told, Vista stock is now down 44.5% year-to-date, and the massive impairment charge has left the company with a price-to-earnings valuation firmly in the negative (on a GAAP basis). So is all hope lost, or could this actually be an opportunity to buy Vista stock on the cheap?

It really depends on how quickly the company can return to growth. Consider this: GAAP profits may be lacking, but Vista still generated a good $120 million in positive free cash flow last year. Thus, Vista currently trades for less than 10 times its cash flow. On the other hand, it also carries $1.1 billion in net debt, giving it an enterprise value-to-free cash flow value closer to 20. That may not be terribly expensive if Vista achieves projected annual growth rates of 16% over the next five years.

If Vista should misfire again, though, look out below.

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