This Stock Is About to Split in Two. Here's Why Both Companies Will Be Buys.

[view original post]

Vista Outdoor (VSTO -3.26%) is using the completion of the most successful year in the company’s history to serve as the launchpad for splitting itself in two. The outdoor gear and shooting sports leader will split its businesses into two stand-alone, publicly-traded companies.

Because outdoor recreation has become a fast-growing market, especially after the pandemic inspired consumers to get outside and get away, and shooting sports has its own catalysts for future expansion, investors should see both of the companies as excellent investment opportunities.

Image source: Getty Images.

M&A is a part of its DNA

Vista Outdoor was itself created as a sporting goods stock spinoff when aerospace and defense contractor Alliant Techsystems merged with Orbital Sciences in 2015. Since then it has cobbled together a collection of well-known and respected sporting goods and shooting sports brands and businesses, such as CamelBak, Bell, Giro, Savage Arms (a firearms manufacturer it eventually resold), and Remington ammunition.

Last year alone Vista packed its portfolio with five different acquisitions, including ammo maker Hevi-Shot, e-bike maker QuietKat, and Fiber Energy Products to add to its Camp Chef cooking brand, which was also the product of an acquisition.

Having loaded up with this bevy of businesses, it is now allowing them to narrowly focus on their respective niches, which should benefit both segments.

Image source: Getty Images.

A strong record of growth

Vista reported fiscal 2022 sales of over $3 billion, up 37% and a record for the company. Although obviously helped by the number of acquisitions it made, Vista’s organic growth was still 20% for the year.

Its sporting products division, which concentrates on its ammunition business, saw full-year sales surge 55% year-over-year to $1.7 billion, helped along by the Remington acquisition, but also because of the ammo shortage that has been part of the market for over two years.

Even though firearms demand has been slowing from the breakneck pace set in 2020, demand for ammunition continues to increase at a torrid rate. Rival ammo maker Olin (OLN -4.00%), the owner of the Winchester brand, recently reported its own results that showed the ammo business notched its best quarter of EBITDA in the company’s history.

Vista owns the biggest ammo brand, Federal, as well as a number of other highly respected names including CCI, Speer, and now Remington, businesses that will now be able to make their own capital allocation decisions. 

With almost 14 million new gun owners in the market since the start of the pandemic, demand for ammo remains white-hot, but it’s not a segment that will be high-growth well in the future. It should be considered a steady growth segment that has a long tail of support behind it.

Image source: Vista Outdoor.

The business to watch

The high-growth business will be the new outdoor products one, which will retain the Vista Outdoor name.

Sales were $1.3 billion for the year, up 18%, and Vista says it intends to “lean into” acquisitions even more up until the split so that both businesses will have revenue between $1.5 billion and $2 billion by the time of the separation.

The outdoor products market is seen as representing an estimated $30 billion opportunity with as much as a $100 billion addressable market worldwide.

Vista CEO Chris Metz will continue to lead the outdoor products company, while the sporting business executives will be named at a later date.

In the discount bin

The pandemic really put momentum behind both businesses, and though the outdoor gear becomes the company that should maintain that trajectory, the ammo business remains on a very profitable path higher, too. 

Both businesses should be solid companies at the time of the split (expected to be completed sometime next year) and for many years after. With Vista Outdoor trading at five times trailing and expected earnings, at a fraction of its sales, and for just 10 times the free cash flow it produces, its stock is a discounted bargain.

Considering you’re also getting a buy-one-get-one-free deal with it, this offer may be too cheap to pass up.