Description

This is a trade, with a timely catalyst, but with enough margin of safety that you can underwrite the investment too. I like having multiple ways to win and Clarus provides multiple event paths to a higher stock price both in the short-term or long-term. I will highlight the set-up and salient facts.

I think the number one reason this is attractive is because of Warren Kanders. Warren is an astute businessperson that has created tons of value over time. He owns 15% of the equity here, and I believe he views the success of Clarus as a personal reflection on his reputation. Thus, I think the recent stock performance is wholly unacceptable to him for both of the above reasons – his personal financial and reputational incentives should drive this higher. He is most famous for taking control of Armor Holdings early in his career and delivering a 100-bagger over a decade. He also controls Cadre Holdings (CDRE), which has been volatile, but is now up ~150% since its IPO two years ago.

Clarus is a buy and build strategy of “Super fan” outdoor brands. Many past write-ups delve into these details so I won’t repeat them here. The website also does a good job of outlining the brands.

I’ll break up the portfolio along the non-ESG friendly brands and everything else. We believe that their bullet brands Barnes and Sierra are a non-starter for funds with any kind of ESG filter.

That aside these are amazing business that have cult like following within their “fan” base.

Warran Kanders has made an opportunistic approach to the company to take these brands private, at a somewhat depressed price. In essence though he put these brands into play by creating a floor on the value of this segment referred to as a “Precision Sports” and the company has formed an independent special committee to evaluate his offer. The committee has retained Houlihan Lokey as their banker. I originally thought Kanders was going to be able to steal this in the thick of the night, but it appears, per the last conference call, there are “multiple interested parties”. Thus, we believe the floor value for Sierra and Barnes will prove conservative. The Kander’s proposal does provide high certainty to close though, which matters a lot in this market.

Here is a copy of Wander’s original proposal and response of the company:

https://www.claruscorp.com/all-sec-filings/content/0001104659-23-101349/0001104659-23-101349.pdf

https://www.claruscorp.com/all-sec-filings/content/0001104659-23-101772/0001104659-23-101772.pdf

Clarus has guided to about $365m of total sales this year, of which we believe precision (Sierra and Barnes) represent $90-100m of sales. Leaving $265 of sales for the “stub”.

Kanders has offered $160m for Precision sports. Pro-forma for this offer the parent could retire all its debt and sit with a $50m ish cash balance. This alone, we think, we cause a re-rating of the stock.

If we value, the remaining $265m of revenue ex Precision at a reasonable 1.5X sales against a pro-forma EV of ($5*38.5m – 50m) = $142m we now see that the parent will be attractively priced relative to this bid. Obviously with “multiple bidders” this delta could be even greater. On a per share basis, after accounting for the cash implies a $11+ stock price versus $5 today.

Given Kanders owns 15% of Clarus and has done a tender many years ago at $8/share we believe he will effectuate a tender if the stock price doesn’t re-rate with the excess cash post transaction early next year. He’s definitely an “Outsider” CEO.

Separately to note there is an active lawsuit that Clarus has against a hedge fund that has some lottery ticket value. Not counting it to the upside but it could be substantial against the current stock price - $1/share possibly.

We see the likelihood of some deal as high, but worst case is they hold on to Precision and you still have an undervalued entity. We think Precision is worth 2-2.5X sales and Outdoor and Adventure segments are worth more than the 1.5/X sales we are ascribing. In the hands of a proven capital allocator, we like the set-up with both near term and longer-term catalysts.

There are reasons to be optimistic too. From the Q3 call.

In Australia, new car sale records have been broken for the third month running with the Australian car market posting its best ever September. As such, we experienced sales in Australia surpassing the 20 million Australian dollars level for the quarter, which is a level not seen since the first quarter of 2022. This was driven by strong OEM sales with the introduction of a new vehicle and product line and strong sell into a new box retail partner. The team did a tremendous job engaging with key accounts like these to promote our vision and product horizon was well received.

Responses to Expected Pushback

The Precision Sports segment decelerated fairly dramatically in 3Q; is it worth $160m+?

While two months have now passed since Warren Kanders made his bid for the business, he likely had already seen some of the deceleration in the numbers when he made his bid. This is admittedly a volatile business, but a $160m purchase price is probably around 5x mid-cycle EBITDA. We would be happy to own this business outright over the coming decades at a starting valuation of $160m. Further, the events of October 7 occurred after the bid was made, which has led to increased demand, especially for certain military calibers. Also to consider is this business usually does well into an election cycle and Kanders has factored that into his calculus.

Is 1.5x revenue really a reasonable/conservative multiple for the Adventure and Outdoor brands?

While peers are trading at less than 1.5x revenue in the market right now, we think 1.5x is reasonable if not conservative for mid-cycle and/or private market valuation expectations. Lots of consumer/outdoor brands are cheap right now, and we think Clarus is one of them (with more catalysts than many). Regardless, at ~0.5x sales for the stub, we think risk-reward is pretty compelling should the near-term catalyst not materialize.

Catalyst

• Kanders or another bidder signs definitive agreement to buy Precision Sports business
• Victory/Settlement in lawsuit against HAP trading
• Share repurchase/tender
• Analyst day in January to lay out plan/vision for Outdoor and Adventure segments