Vista Outdoor (NYSE:VSTO) has reported the company’s Q4/FY2024 financial results and provided a FY2025 financial outlook. The company’s strategic review regarding the split up of the Revelyst and Kinetic Group segments is heating up as a shareholders’ vote is to be held soon on the sale of The Kinetic Group. At the same time, Vista Outdoor has received an offer for the sale of the entire company for $37.50 per share.

I previously wrote an article on the stock titled “Vista Outdoor: A Controversial And Intriguing Segment Sale”, speculating on the strategic rationale of the segment sale. The previous analysis was published on the 9^th of February with a hold rating. Since, Vista Outdoor’s stock has appreciated by 15% compared to an S&P 500 appreciation of 6%.

Q4 Financial Report

Vista Outdoor reported the company’s Q4 results on the 8^th of May. The Revelyst segment showed revenues of $332.1 million, up 1.4% year-over-year, despite several recent quarters showing revenue declines for the segment. The Kinetic Group segment showed revenues of $361.6 million, down -12.5% year-over-year. In total, the revenues missed analysts’ expectations by $8.4 million, only representing a small miss. The normalized EPS was reported at $1.02, beating estimates by $0.07.

Overall, the reported financials in the quarter were very good in my opinion – Revelyst showed stronger revenues than previously, and the segment’s adjusted EBITDA improved from $9.4 million in Q4/FY2023 to $29.1 million. While the Kinetic Group showed a significant fall in revenues, such a trend was already expected, and the adjusted EBITDA fall from $130.8 million in Q4/FY2023 into $100.3 million was largely expected. The segment is also looking to be sold, and if the transaction goes through, the segment’s financials no longer matter to Vista Outdoor’s shareholders.

FY2025 Guidance Expects Significant Margin Expansion for Revelyst

With the Q4 report, Vista Outdoor also gave a financial guidance for FY2025. For Revelyst, the company now expects revenues of $1.24-$1.30 billion compared to $1.29 billion in FY2024. Yet, despite weak expected revenues as the macroeconomic environment is expected to stay uncertain and as a fire occurred in Fiber Energy’s production facility as explained in the Q4 earnings call, the segment’s adjusted EBITDA is expected to grow from $98.3 million in FY2024 into $130-$160 million in FY2025 as the GEAR Up cost savings initiative is expected to bring down costs by $25-$30 million in FY2025 of the total $100 million planned. In my previous DCF model in February, I expected adjusted EBITDA of $132.6 million in FY2025, at the lower bound of the given guidance. The given guidance raises my faith in the company’s ability to achieve the $100 million goal, which I partly doubted in my previous analysis.

The Kinetic Group’s challenges are expected to continue in FY2025, as a global powder shortage is ongoing and raw material costs are expected to have significant inflation. Sales for the segment are guided at $1.425-$1.475 billion, with the middle point translating to flat sales year-over-year. The adjusted EBITDA is guided down significantly, as the company now expects the Kinetic Group to generate adjusted EBITDA of $350-$400 million in FY2025, below the $416 million generated in FY2024. If the CSG transaction goes through, Kinetic Group’s financials do not matter to shareholders, but for the time being, the financials should still be looked at.

Strategic Option Speculation Is Heating Up

Vista Outdoor’s current plan is to divest the Kinetic Group segment, representing the company’s shooting product brands for an enterprise value of $1.91 billion. A shareholder vote is to be held about the transaction on the 14^th of June – speculation and anticipation for strategic moves are heating up, as a decisive decision for the sale of the segment is to be held soon. The proposed sale still also requires approval from the Committee of Foreign Investments in the US, and CSG has assured to maintain the business in the US to satisfy the committee.

On the other hand, Vista Outdoor has also received an increased offer from MNC Capital, proposing an acquisition for $37.50 per share instead of $35.00 that MNC Capital previously proposed in March. As the shareholder vote for the sale of The Kinetic Group is nearing, an increased offer from MNC Capital is possible in the very near future as Vista Outdoor’s board has still suggested the company to give a higher offer to compete with CSG’s offer.

The speculation around strategic options stays high. While the rationale for the CSG offer is unclear as the segment’s financials continue to be turbulent, the segment sale could make Vista Outdoor’s assets’ value proposition clearer to investors. Also, the Revelyst segment is expected to increase earnings considerably with cost savings, making the segment potentially attractive at the current price as the segment separation prepares more streamlined operations. I still believe that a raised offer from MNC Capital could be the best option for shareholders, but such an offer it yet to be seen.

Revelyst Brand Portfolio Moves

The Revelyst segment has seen some small brand portfolio changes in recent months. The company announced the acquisition of PinSeeker on the 25^th of March. The acquired company operates a digital golf simulator platform, to be integrated into Revelyst’s Foresight Sports. While Vista Outdoor didn’t specify the acquisition sum or PinSeeker’s financials, a cash consideration of $16.5 million in Q4/FY2024 can be seen in Vista Outdoor’s cash flow statement making the acquisition modest in its sum, and not significant for shareholders.

On the 2^nd of May, Vista Outdoors again announced a transaction as the company has sold the RCBS ammunition reloading equipment business to Hodgdon Powder. Again, no specific financials were reported, and the cash proceeds from the sale should be seen with Vista Outdoor’s Q1 report. In the Q4 earnings call, the RCBS and Fiber Energy’s revenues combined were estimated at $30 million, making the divestment quite small, too.

Updated Valuation

If the CSG Offer Goes Through

While the Kinetic Group sale is still uncertain, a scenario where the CSG transaction closes would imply moderate upside. I have updated my DCF model from the previous analysis, still only estimating Revelyst financials. Vista Outdoor’s balance sheet now significantly less debt, and the company’s financial position should be much higher than in my previous DCF model.

As revenues are guided to be quite weak in FY2025, I have updated my revenue estimates downwards. Now, revenues are expected to grow by -2.6% in FY2025, by 2.5% in FY2026, and by 2% from FY2027 forward, with revenues ending at $1483.5 million in FY2033 compared to $1598.3 million in my previous DCF model. Vista Outdoor surprised me with the adjusted EBITDA guidance range’s middle point, though, and I estimate a sustainable margin of 15.0% from FY2027 forward as savings are achieved, compared to 12.5% in my previous model. As such, cash flows are now expected higher, and I have elevated the conversion due to good working capital control.

With the mentioned estimates, the DCF model estimates Vista Outdoor’s fair value at $48.57, around 41% above the stock price at the time of writing. The stock has room for appreciation if the transaction goes through, as Revelyst continues to achieve high cost savings.

A weighted average cost of capital of 9.00% is used in the DCF model. The used WACC is derived from a capital asset pricing model:

While Vista Outdoors will still hold debt in the short-term future, the company should pay the debt if the DCF model scenario’s CSG acquisition goes through. As such, I estimate no long-term debt from Revelyst. For the risk-free rate on the cost of equity side, I use the United States’ 10-year bond yield of 4.42%. The equity risk premium of 4.60% is Professor Aswath Damodaran’s latest estimate for the United States, updated on the 5^th of January. I use the same beta estimate of 0.93 as I did previously. Finally, I add a small liquidity premium of 0.3%, creating a cost of equity and WACC of 9.00%.

If No Offer Goes Through

If no strategic option goes through, the stock still has some upside with my DCF model estimates. I estimate a worsening FY2025 and FY2026 for the Kinetic Group, making the growth 1% in FY2026 and the adjusted EBITDA margin 15.0%. As Revelyst achieves cost savings, I estimate the company’s adjusted EBITDA margin to rise to around 16.0% from FY2027, though. The company has quite low capital expenditures, but the adjusted EBITDA doesn’t account for all of Vista Outdoor’s costs, making the cash flow conversion often modest from the non-GAAP figure.

As the CSG deal isn’t expected to go through in this DCF model, I estimate a similar balance sheet with quite sizable debt and minimal cash. The WACC is now 8.44% compared to 9.00% with a long-term debt-to-equity estimate of 25% and an interest rate of 8.29% calculated with Vista Outdoor’s Q4 interest expenses and long-term debt.

With these estimates, the stock now has a higher fair value estimate of $51.87, around 50% above the stock price at the time of writing. The stock seems to pose more upside if the CSG deal doesn’t go through. Still, the gap is small, and the Kinetic Group’s turbulent financials could make the combined company worth less than the DCF model anticipated – the CSG deal going through would bring down the risk level considerably.

Takeaway

Vista Outdoors reported good Q4 results and FY2025 guidance, with Revelyst generating greater adjusted EBITDA in Q4 and is expected to continue the trend in FY2025 due to great cost savings. On the other hand, cost inflation is expected to pressure the Kinetic Group’s earnings in FY2025, despite revenues expected to stabilize after a considerable FY2024 fall.

Also, speculation around potential strategic moves is increasing. The company is holding a shareholder vote on the 14^th of June concerning the CSG offer for the Kinetic Group, but CFIUS also now poses a potential threat to the transaction. In addition, speculation around MNC Capital’s potential raised cash offer for Vista Outdoors is rising after a rejected $37.50. My DCF models estimate the stock to have good upside in either the CSG offer failing or succeeding, though, with the transaction failing posing greater expected upside but risk, too. As the company seems to be valued attractively in either scenario, I upgrade my rating into buy after the good Q4 report and FY2025 guidance.