| 2022 | 2023 | ||||||
| Price: | 11.90 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 37 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 445 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 136 | EBIT | 0 | 0 | |||
| TEV (in $M): | 581 | TEV/EBIT | 0 | 0 | |||
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Clarus was last written up as a short by dynamicmoats on August 1 at $20.60 with 40-50% downside. I’ll assume the reader is familiar with the company and that write-up, and rather than writing a primer/overview type write-up, I’ll try to provide some detail on the specific set-up and will comment on the core bull-bear debate and lay out where I think I have a differentiated perspective compared to what is priced into the stock at these levels.
Dynamicmoats made a good call, and the stock is down by the 40-50% contemplated in that write-up. I believe at least part of the cause of the move lower is not fundamental changes in the business, but rather a wild series of events that perhaps approach being Hollywood-worthy. Here is a quick recap of the series of events that occurred since August 1:
Backdrop / Set-up
Starting sometime last summer, Clarus’ top outside shareholder, TT Investimentos, started to build a large options position in the stock (whether in response to outflows and wanting to maintain their exposure, or just deciding to get more aggressive, or what, we aren't sure) - I'll come back to this below.
The options activity was so great that weekly options were listed, and options with strikes every $0.50 were listed, etc. Huge options volume led to huge volume in the stock. Clarus used to trade a few hundred thousand shares a day; at points this summer it was trading 10 million shares plus (against a share count of ~37 million shares).
As TT started buying huge options positions, a number of hedge funds that are basically options market makers started to take the other sides of these trades. Three of these funds wound up collectively taking stock and options positions in over 50% of the shares outstanding.
https://www.sec.gov/Archives/edgar/data/913277/000093583622000491/claruscorp13g.htm - 7%
https://www.sec.gov/Archives/edgar/data/913277/000089914022000689/c090222a.htm - 17.1% (see Explanatory Note)
https://www.sec.gov/Archives/edgar/data/913277/000108514622003214/clara1.htm - 32.4%
For what it’s worth, each of these filings was made well after the respective funds crossed 5%/10% thresholds. Unless I am mistaken, I don’t believe you can establish a position in 32.4% of a company without filing a Form 4.
Clarus has a poison pill in place at 5% to protect its NOL. Here are Clarus’ responses to two of these funds:
Whether through a gamma squeeze or a short squeeze (short interest was 9-10mm shares), the stock squeezed up from ~$20 to ~$28 during early to mid-August. This was shortly after the company reported 2Q results, but it seems clear that this move was not driven by fundamentals.
At some point during this period in late August, according to Bloomberg, TT Investimentos blew up, and following the short squeeze, Clarus stock price collapsed.
I believe that at least part of the move in the stock is attributable to non-fundamental factors, as outlined above. There is still highly elevated short interest (~8mm shares – perhaps one third of the float).
I believe that Clarus is a good value under $12, and that risk-reward is skewed to the upside.
Primary Bull/Bear Debate
As dynamicmoats laid out in his or her write-up, the primary bull-bear debate about Clarus has been related to the bullet and ammo business.
I believe that Sierra and Barnes are more differentiated in the marketplace than the bear case suggests, and that the earnings power of the business has taken a step change higher over the last few years. Yes, I model that the last four quarters or so were an cyclical industry peak, but I think normalized for Clarus is higher than the bear case believes. A few points:
1) The bear case assumes that Barnes should add just $3mm of normalized EBIT including synergies. I think this misses the quality of Barnes when being run properly.
I think the market doesn’t appreciate how challenged Barnes was when it was inside of (bankrupt) Remington, nor what the normalized (and peak and trough) levels of sales and profits are for the brand.
Capacity utilization was poor, the sales team was in disarray, supply chain was challenged, etc.
Earlier this year at a sell-side conference, Clarus mentioned that Barnes was tracking to $60mm of sales with 40%+ EBITDA margins ($24mm+ of EBITDA).
2) Clarus’ bullet/ammo segment has undergone a mix shift from bullets to ammo. While both bullets and ammo have similar margin profiles, ammo sells for almost 10x the price. So while there has been a strong bullet/ammo cycle, Clarus has 10x’d some of its revenue organically as well.
3) Sierra and Barnes have won new shelf space during the last few years. This should be somewhat sticky even as the cycle rolls over. This also indicates that the next trough for these businesses should be higher than the last trough (and that mid-cycle is also structurally higher).
One additional point is that ammo prices have already rolled over, yet Clarus’ earnings power in this segment has remained fairly strong. I think if it were as simple as “Clarus just sells commodity products” in its Precision segment, we would have already seen results roll over.
Valuation
Whether I am right on the above or not, I believe that there is a price for everything. I believe that at this price, one way of looking at things is that the market is essentially assigning no value to the bullet/ammo business within Clarus. It’s not that bad!
Clarus is trading at a $445mm market cap and $580mm enterprise value. I believe CLAR should generate some additional FCF before year-end, bringing the EV down slightly further.
Some may want to approach this on a SOTP basis. Black Diamond could be worth 2-2.5x sales, incline with comparable transactions in the outdoor space over the last decade ($450-600mm), Sierra/Barnes could be worth $150-200mm (1.5-2x sales or 4-5x recent EBITDA), and Rhino Rack could be worth about what Clarus recently paid for it, or $200mm. This would put the three major segments at $800mm-1bn. You can subtract what you feel is appropriate for corporate/overhead (maybe $100mm). This yields valuations of $16-21/sh.
If we assume $75mm of EBITDA or so is reasonable over the next few years (assuming growth in BD and Rhino Rack offset declines in Bullets/Ammo), then 10x EBITDA gets one into a similar valuation range in the high teens).
Neither of these approaches give much credit to future successful capital allocation, and given the team here, I believe that is an important component of the story. No one wants to talk about an upside case right now, and that is fine. But there is a path to $100mm of EBITDA in the next 3-5 years, and without too large of a dose of animal spirits, this could trade at perhaps a 12x multiple, getting the stock back into the $30s.
What is an extreme downside case? If we add up the values Clarus paid for its various assets (BD, Pieps, Sierra, Barnes, Rhino Rack, and MaxTrax), that works out to about ~9.00/sh. I believe that the CLAR team have been good capital allocators over their careers, and that they tend to do good deals. I don’t believe they overpaid for any of these acquisitions.
When contemplating using the prior acquisition prices as a proxy for extreme downside, it is worth noting that CLAR purchased BD for $90mm over 10 years ago and paid around 1x sales; now BD is doing 2.5x as much revenue and I think pretty much anyone in the outdoor industry would tell you it is worth way more than $90mm. This analysis also of course embeds the $30mm purchase price for Barnes, which was a fire-sale bankruptcy sale, and in retrospect was likely an extreme bargain for CLAR (it has probably generated more than the purchase price in EBITDA since the acquisition, or is getting close).
So I think $9/sh would be absurd, and I would not be surprised to see massive buybacks or a tender if the company trades into the single digits. Maybe downside is 15% or so to $10, but I’m not even sure it gets there.
And as I said, I think upside is 45-100%, and potentially higher over time. To me, that is a decent risk-reward.
Hidden Assets
On September 23, Clarus filed a lawsuit against HAP trading to attempt to recover short-swing profits of a 10%+ holder.
https://www.claruscorp.com/legal-filings
While uncertain, this lawsuit could result in a payment to Clarus of somewhere between $0 and $2+/sh. This is a nice lottery ticket embedded in this situation. If the company collects, say $40mm, it could buy back 10%+ of its shares or use the capital to do additional deals.
Risks/Headwinds
- FX has certainly been a headwind; CLAR has a reasonable amount of exposure to EUR and AUD
- General economic headwinds; weak consumer
- Rhino Rack is tied to the auto OEM cycle in Australia
- Slowing in bullets/ammo
- buybacks/capital allocation
- normalization of options activity/short interest
- bullet/ammo cycle not as bad as feared
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