Just because Vista Outdoor's (VSTO -2.23%) firearms business weighed on its performance for another quarter doesn't mean its stock is not a buy. In fact, despite the segment's poor showing, investors may want to take a closer look at this company, which could be at the beginning of a big turnaround.
Gun segment shot down
In its fiscal third quarter 2018, which ended Dec. 31, 2017, revenue from Vista's shooting sports segment tumbled 21% to $286 million from the year-ago period, while gross profit for the segment plunged almost 50% to $52 million. Management said weak market conditions will compel it to deeply discount products just to maintain market share, meaning its profits will come under further pressure in its fourth quarter.
The segment's sales have gone from accounting for 55% of Vista's revenues last year to under 50% in the most recent quarter. (The company's other segment is outdoor products.) In addition, a rise in commodity prices is taking such a toll on its ammunition business that not only did it implement price hikes in January in the low- to mid-single-digit-percentage range, it plans another, similar round of price increases in April.
Olin, which owns the Winchester brand of ammunition, recently noted that the price of copper had increased 21%, zinc prices were up 19%, and lead rose 12%, and said it doesn't think the ammunition price increases that Vista and others have announced are actually enough to offset the rising cost of metals. Vista probably concurs: It said others in the space have been laggards about raising their prices, but it doesn't see how they'll be able to hold off for much longer.
A new company emerging
It's possible that Vista Outdoor will emerge from this difficult period a much leaner company, as CEO Christopher Metz has discussed "rationalizing" the number of products it offers. Although Vista will continue to bring new products to market, Metz admitted that it hasn't been good about shedding underperforming lines. That won't be the case anymore.
Last quarter, it announced it was putting its Bolle brand up for sale. Bolle primarily makes sunglasses, but also helmets for skiers and bicyclists, and the company considers it a non-core unit. Given that the brand has received a lot of interest from potential buyers, Vista may put even more divisions on the auction block.
The firearms and outdoor gear maker will also undergo a bit of a reorganization in the near future, and has already lined up a new credit structure to better finance its plans. Vista paid down its revolving credit facility in anticipation of refinancing its current credit lines using an asset-based loan (ABL) structure accompanied by a term loan. ABLs provide financing based on the value of the underlying assets, which if valuable, can sometimes give the borrower a lower interest rate, though Vista doesn't anticipate its rates changing all that much.
"We do feel like going to an ABL would give us some flexibility that we don't currently have," Metz said in the most recent conference call with analysts. "And every bank we've talked to was in unanimous consensus that the direction we're headed is the right direction given where we want to take the business."
When Vista Outdoor has its new system in place -- which should happen by mid-2018 -- it should be able to make more targeted investments in its business, along the lines of the new 224 Valkyrie cartridge that it specially designed for modern sporting rifles (MSR). MSRs are the most popular class of rifles sold today, and the new round provides then with supersonic velocities at up to 1,300 yards and a very flat trajectory. Vista also introduced a new MSR under its Savage brand -- the MSR 15 Valkyrie -- to take advantage of the new round's capabilities.
To get the most mileage out of it, though, Vista will need other gunmakers to produce rifles for the round, and it has worked with a number of companies that are now in the process of manufacturing them.
A good value
Ultimately, Vista Outdoor has been put through the wringer over the past year or so, and fared much worse than either Sturm, Ruger or Smith & Wesson. Since the 2016 election, Vista's stock has lost nearly two-thirds of its value compared to about 50% for American Outdoor Brands and 25% for Sturm Ruger.
Vista management said that when its fiscal year ends at the end of March, it expects to report revenues of approximately $2.25 billion, adjusted profits of $0.50 per share to $0.60 per share, and free cash flow of about $180 million. With its stock selling for just a fraction of its sales and book value, and a deeply discounted 4 times free cash flow, any improvement Vista Outdoor makes on top of what it has already achieved should benefit shareholders.