Vista Outdoor: Fishing For Deals (NYSE:VSTO)

About a month ago, I believed that Vista Outdoor Inc. (NYSE:VSTO) was pursuing M&A at a questionable time, making a big move into outdoor sports, as I wondered if confidence played a role after a very strong performance in 2021 and the first half of 2022. As I was cautious after a past leverage episode, I was a bit cautious despite low (current) valuations.

Former Take

Following a dealmaking streak a couple of years ago, the company was in dire shape in 2019. In that year, sales fell 11% to $2.0 billion, yet a modest EBITDA number of $137 million translated into a 5 times leverage ratio at the time.

The company has seen some continuation of struggles in its fiscal year 2020 (starting in spring of 2019), as all options were on the table, including a potential for a painful bankruptcy, as well as potential huge value creation.

The pandemic provided a boom in the demand for ammunition, including for the usage of shooting sports as outdoor offerings were in demand as well. Revenues rose to $2.2 billion in the fiscal year 2021, as a net loss of $132 million turned into a $272 million profit. Great operating leverage was demonstrated, with Vista posted earnings of $4.50 per share. With net debt to about a quarter of a billion and profitability vastly improving, leverage ratios fell to just 1 times.

The company saw continued momentum in the fiscal year 2022, as operating momentum triggered Vista into making a $474 million acquisition for Foresight Sports in the year 2021, to grow in golf performance, entertainment and game enhancement filings. That deal increased leverage to three-quarters of a billion, pushing up leverage. However, with the core business on track to generate some $3 billion in sales, while the company posted earnings close to $7 per share, the (current) earnings power was there to support this debt load.

Shares rallied to the $50 mark early into 2022 as fiscal year 2022 results were very strong, with sales posted at $3.04 billion, on which an operating profit of $646 million translated into net earnings of $473 million, or $8 per share. The company guided for 2023 sales to increase to $3.2 billion, with earnings set to fall back a bit to $7.00-$7.75 per share. The company furthermore announced its intention to separate outdoor products and sporting segments, just like peer Smith & Wesson has done.

Amidst all of this, the company announced the purchase of Fox Racing early in July, in a $540 million deal in which earn-outs have the potential to increase the deal tag to $590 million in order to add $350 million in performance motocross, mountain hike and lifestyle brand revenues to the business. Shares of Vista traded at $27 at the time, as a $2.2 billion enterprise valuation indicated that this deal is quite substantial, equal to about a quarter of the pre-deal valuation.

Following the Fox Racing deal, pro forma net debt increased to $1.2 billion, as the uncertainty in the economy was still very much there. Furthermore, Vista was acquiring this business at 10 times EBITDA, while its own business trades at just 4 times, leaving the question if money could have been better spent on buybacks, as leverage is increasing quite a bit as well.

With earnings power at $7 per share revealing just a 4 times earnings multiple, the biggest risk for Vista is not just falling earnings, but likely leverage, which might become an issue at such a point in time.

And Now?

In the month since early July, shares of Vista have gradually ticked up to the $30 mark. Later in the month, Vista posted its first quarter results for the fiscal year 2023. Sales rose 21% to $803 million, with adjusted earnings per share rising to $2.31 per share as the guidance was comforting. Full year sales are now seen between $3.200 and $3.325 billion following inflationary pressures, with adjusted earnings now seen between $7.05 and $7.65 per share.

Net debt was posted at just $550 million, but that is ahead of the Fox deal, of course, increasing the pro forma net debt load to $1.09 billion, down already a bit from the time of the announcement of the deal. With EBITDA seen at $700 million, leverage ratios look very reasonable, but note that earnings are very strong already based on historical standards.

Despite all of this, the company announced the next bolt-on deal alongside the first quarter earnings report. The company has reached a deal to acquire Simms Fishing Products. Vista will pay $192 million for the premium fishing brand and manufacturer of other outdoor products and apparel.

The deal will add $110 million in sales, which reveals a relatively modest sales multiple, certainly if we account for $20 million in future tax benefits. The company expects accretion to earnings but has not quantified this. Furthermore, the company expects to not announce any meaningful acquisitions until the separation later this year, as the focus will be on operations, integration, and the spinoff.

Concluding Thoughts

Truth is that I am largely reiterating my stance from before, as some deleveraging in the meantime is now followed by the next deal. All of this while the economy is clearly facing some uncertain times and Vista itself is preparing for its separation. Current multiples look very low, yet leverage is high if profitability normalizes, leaving me still a bit cautious here.