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For outdoor recreation stocks, 2020 was a good year. Many Americans have increasingly shown interest in outdoor recreation activities like hiking, camping, biking, hunting and fishing as dining out, movie-going and other forms of entertainment took a back seat due to the pandemic. These trends worked in favor of companies like Vista Outdoor, American Outdoor and Johnson Outdoors.
Vista Outdoor and American Outdoor, which also cater to shooting sports and the personal protection market, are gaining from a spike in the sale of firearms. Citing the National Shooting Sports Foundation, American Outdoors stated that nearly 8 million new firearm owners entered the market in 2020.
The question now is whether these trends are temporary or the interest in outdoor activities and personal security will continue? We will break down what Wall Street has to say about these two companies and use TipRanks' Stock Comparison tool to pick the stock offering a more compelling investment opportunity.
Vista Outdoor (VSTO)
First up is leading manufacturer of outdoor sports and recreation products, Vista Outdoor. The company derives about 68% of its revenue from its shooting sports business, which includes ammunition, hunting and shooting accessories product lines. As part of its multi-year transformation plan, Vista divested its firearms business in the previous fiscal year and focused on reducing debt through enhanced cash flow generation and divestiture of non-core businesses.
Thanks to COVID-induced tailwinds, Vista’s 2Q FY21 (ended Sep. 27) sales increased 29% to $575 million. E-commerce sales were up 100%.
The company posted adjusted EPS of $1.10 compared to break-even earnings in the prior-year quarter as gross and operating margins expanded across both shooting sports and outdoor products segments. Cost-control initiatives and favorable product mix helped boost margins. (See VSTO stock analysis on TipRanks)
Vista is well placed for further growth, especially in the ammunition space where as per the company, demand is far outpacing supply. Commenting on its order backlog, the company stated on its 2Q conference call that it has “over a year's worth of orders for ammunition in excess of $1 billion.”
To further strengthen its ammunition and shooting sports business, Vista acquired certain assets related to Remington Outdoor’s ammunition and accessories businesses in October of last year.
Like Vista, Cowen & Co. analyst Gautam Khanna also feels that an extended demand tailwind for the company’s ammunition products is likely.
The reasons cited by Khanna included President-elect Biden's stricter gun control ambitions that could drive ammunition and firearms demand, the spike in ammo demand due to the "influx" of new shooters in 2020 and lower retail inventory levels. The analyst also feels that Vista's ammo business could gain from the cultural "Armageddon" mentality that may continue amid the pandemic, civil unrest fears and the potential for expanded market share due to the Remington acquisition.
Given the ammunition demand upcycle, compelling valuation and overhangs (like portfolio quality and leverage) that have abated, Khanna upgraded Vista to Buy from Hold and increased the price target to $33 from $29.
The rest of the Street mirrors Khanna’s optimism, with 5 Buys adding up to a Strong Buy analyst consensus. The average price target stands at $32.60, reflecting an upside potential of 30.8% from current levels. Shares shot up by a staggering 217.6% in 2020.
American Outdoor Brands (AOUT)
The current American Outdoor came into being in August 2020 after the original company was split into two publicly traded companies—Smith & Wesson, which makes firearms (trades as SWBI) and American Outdoor, which focuses on outdoor products and accessories (started trading as AOUT).
The company sells outdoor gear and accessories associated with hunting, fishing, camping, shooting and personal security as well as owns reputed brands like Crimson Trace, Schrade and Tipton. (See AOUT stock analysis on TipRanks)
Pandemic-induced demand drove a 66% rise in American Outdoor’s 2Q FY21 (ended Oct. 31) sales to $79 million. Nearly half of the company’s brands experienced triple-digit sales growth. E-commerce sales spiked over 213% to $26.2 million.
On the profitability front, adjusted EPS increased 285% year-over-year to $0.77, with gross margins exploding 690 basis points to 46.9%. Following a robust first half, the company expects its FY21 revenue to rise about 40%-46%.
Looking ahead, American Outdoor aims to capture growth opportunities in the $30-$35 billion rugged outdoor recreational market through robust innovation and the acquisition of new brands.
Acknowledging that the company’s 2Q results were well above his estimates, Lake Street analyst Mark Smith increased the price target on American Outdoor to $24 from $23 and reiterated a Buy rating. In a note to investors, Smith stated that improved outdoor participation rates and "healthy" FBI background check data support strong firearm and accessory demand, thus benefiting the company.
The 5-star analyst also feels that the investments by the company in e-commerce will allow it to continue to grow in a strong market.
Like Smith, C.L. King analyst Scott Stember also has a Buy rating for American Outdoor, bringing the Street’s analyst consensus to a cautiously optimistic Moderate Buy.
The stock is currently trading at a 42% discount to its six-month high of $30.01. Shares could rise 21% in the year ahead as reflected by the average price target of $21.
Both Vista and American Outdoor are gaining from favorable trends in shooting and outdoor recreation activities. That said, Vista’s strong exposure to the ammunition business and higher upside potential in the stock make it a better pick than American Outdoor currently.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment