Weak ammunition trends and a slump in retail demand for firearms have compelled analysts to slash prices targets. When the company reports fourth quarter earnings on Feb. 9, it is expected to report substantial losses instead of previously expected profits of 70 cents per share.
It's probably best to wait for the results to see the extent of the damage before buying the stock, which has already lost 33% this year.
A few factors have unnerved investors about Vista in recent weeks. Gun stocks have underperformed the market since President Donald Trump won the election.
Vista Outdoor's announcement that the company will take a $400 to $450 million impairment charge in its hunting and shooting accessories surprised investors. Management admitted this non-cash impairment charge resulted from challenging market conditions, something which worsened as the third quarter progressed.
Vista Outdoor was downgraded by DA Davidson from buy to neutral, and also lowered the price target to $28 from $35. The firm believes Vista Outdoor is having issues marketing new products amidst politically divisive market sentiment.
Additionally, a growing portion of the company's business mix is facing external headwinds, according to DA Davidson. The somber outlook does not bode well for the company's upcoming quarterly earnings, where Vista is anticipated to report a 17% drop in earnings per share (EPS), although there could be nearly 14% sales growth.
If retailer inventory cautiousness and weakening ammunition demands persist, expectations for Vista to deliver over 9% EPS growth in fiscal 2018 ended in March could be misplaced.
Already, experts do not expect Vista's peers like Sturm, Ruger & Co. to show much promise this year with EPS forecasted to fall 15.5% this year. American Outdoor Brands is also estimated to post a nearly 6% drop in EPS in its fiscal year ended April 2018.
While 2016 saw the firearms market experience unusual demand spikes following terrorist incidents, the industry now faces difficult year-over-year comparisons. Categories like modern sporting rifles and compact/concealed carry handguns are showing growth, but gun sales overall are likely to slow in 2017 as forecast by Wunderlich Securities.
Keybanc analysts say that demand for firearms has come under pressure in January. Furthermore, high inventory levels will mean that shops will cut orders of new inventory, which is negative for Vista's profits.
The acquisitions in 2016 of Jimmy Styks, CamelBak and the Action Sports division of BRG Sports for a total of approximately $850 million are some cause for optimism.
With the company's business environment turning drab, it will require something special from Vista's management to show earnings have the resilience and diversity to pull through. Investors should wait for the company's latest take on business outlook and earnings before buying Vista's shares.
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