Description

1. Quick Summary

AOUT is a supplier of rugged outdoor equipment.  The company was recently spun out of AOBC as a way to unburden AOUT's from SWBI's firearm overhang and allow the company the ability to pursue organic and inorganic growth in a simpler fashion. 

The stock may be mispriced as it is <25% of SWBI's market cap (22% owned by passive index funds pre-spin) and many investors used SWBI as a method for trading firearm inflections.  If AOUT is able to generate its prior target EBITDA of ~30mln then it could be worth >$31 per share and over$40 per share if the company is able to make accretive acquisitions.  Conversely, if results don't improve then downside protection seems relatively solid at ~$11 which seems like an attractive risk-reward at $14.

1. Capitalization and Valuation

AOUT has ~14mln shares for a $196mln market cap at $14.  Post spin the company has 25mln of net cash for a total EV of 171mln.  FY 4/21 sales are guided to be 200mln (0.85x) and EBITDA is expected to be ~20mln (8.5x).  EBITDA is a good proxy for cash flow as D&A (23mln) is much larger than capex (~2mln normalized). 

1. Upside

AOUT is working to increase its market share in the ~$35bln rugged outdoor market.  The company's "Dock and Unlock" plan has allowed its brands to introduce new products (300 SKUs per year) that expand their TAM by addressing adjacencies in the brands "permission to play".  

AOUT has shown some ability grow organically by expanding product lines of various brands including Bog (>200% sales growth in FY 20) and Bubba (>100% sales growth in FY 20). They have also successfully entered the post-hunt meat processing business by launching the Meat! brand. They describe the brand portfolio. The company notes that it believs their brands are in their infancy and have yet to be fully explored, representing a significant runway for long-term organic growth.

The company announced targets for AOUT when the spin was announced in Nov 2019 (affired in March 2020) that suggested $200-210mln of revenue and PF Adj EBITDA of 25-30mln in the first 12 months as an independent company.   Given that EBITDA margins were 16% in FY 18 and 20% in FY 17, it suggests that there is significant room for profitability improvement.

With 30mln of EBITDA at ~14x (CLAR at 16x), AOUT would be worth ~$31.  That corresponds to ~2x revenue also similar to CLAR and ~16x FCF.   If the company was able to spend 75mln on acquisitions at ~8x EBITDA, then the stock could be worth >$40.

It should be noted that the prior CEO of AOBC was planning on moving to AOUT despite its significantly smaller size.  Members of the current management have bought >$400k of stock at ~$13.29. 

1. Downside

AOUT's 20 brands have real history and resonance with the rugged outdoors. It should also be noted that AOBC spent ~$367mln ($26 per AOUT share) to build this portfolio of assets.  It is highly likely that they would have significant value to a buyer if the company is unable to continue on its growth trajectory

AOUT has a strong balance sheet with 25mln of net cash and 0 debt.  Damaged peer VSTO trades at ~75% of sales and almost 8x FY 22 EBITDA.  At 8x TTM EBITDA and ~0.75x TTM sales, AOUT would be worth ~$11.50 per share. 

That would also be a ~10% FCF yield on 15mln of FCF

Risks

1. AOUT sells to a concentrated (top 3>40%) group of retailers and is still mainly exposed to brick and mortar outlets.  Thus, further brick and mortar problems or customer pressure could hurt revenues and margins. 
2. Some AOUT customers have pursued private label to replace AOUT products
3. Results could be overstated due to high COVID demand for outdoor goods
4. Still some tie to firearms demand through hunting and home defense
5. Chinese tariffs have been problematic historically and could continue to be a profitabilty headwind.

Catalyst

Continued Organic Growth

Accretive M&A