CLAR - Clarus: Zoning In On A Multi-Year Bottom

2023-07-28 14:57:29 ET

Summary

• Clarus Corporation may be forming a technical bottoming pattern, with shares trading in a range since the beginning of the year.
• The company's ability to generate positive cash flow and its projected free cash flow per share of $0.94 makes it an attractive investment.
• Improving earnings revisions and growth potential in its outdoor and precision segments suggest positive changes in Clarus' fundamentals.

Intro

Clarus Corporation ( CLAR ) is a global player in the outdoor equipment & lifestyle products markets. The attractiveness of Clarus from an investor's standpoint is the fact that the company's brands have a long runway for growth in the markets they operate in. Furthermore, whether this is the shooting, trail running, or mountaineering market, the exodus from the global pandemic and its associated restrictions has to be a tailwind from which the company can take advantage.

We wrote about Clarus back in January of this year when we stated that the outdoor leisure & lifestyle company needed to begin generating positive cash flow quickly in order for the share price not to be revised down further. The stock at the time was just off the back of an ugly Q3 earnings miss, which resulted in guidance being revised down for the fiscal year. Since then, we have seen Clarus' 2022-Q4 earnings, as well as the company's first-quarter earnings numbers this year. Both periods missed the consensus target, although the magnitude of the misses was much smaller in nature than that Q3 period last year. To put it simply, we think green shoots may finally be forming in Clarus Corporation.

In fact, as seen from Clarus' technical chart below, shares have been trading in a trading range from roughly $8 a share to $10 a share since the turn of the year. Suffice it to say, given the huge collapse in the share price over the past 20+ months, Clarus may finally be undergoing a long-awaited technical bottoming pattern here.

Value Case Based On Q1 Trends & Guidance

When growth is non-existent in beaten-down stocks, we think it inevitably comes down to the respective company's ability to generate positive cash flow in a sustained fashion. This in turn brings longevity to the equation & stabilizes the financials over time. Although Clarus' sales and net earnings of $97.4 million & $1.6 million in Q1 this year were well down compared to the same period 12 months prior, the big plus was that operating cash flow once more came in positive at $3.2 million for the quarter. This number comes off the back of positive operating cash flow of $32+ million in Q4 last year, which means, the momentum regarding Clarus' ability to generate its own cash was kept going.

Furthermore, based on recent trends, the CFO guided fiscal 2023 free cash flow of approximately $35 million. Therefore, if we take this estimate ($35 million) and divide it by the current number of shares outstanding (37.19 million), we get free cash flow of $0.94 per share for the company. Suffice it to say, given that Clarus' closing price yesterday was $8.51 per share, dividing the company's free cash flow per share into the stock's current share price, we can deduce what we think is a very attractive forward price to free cash-flow ratio of 9.04.

Improving EPS Revisions

The price-to-free cash-flow multiple is probably our favorite valuation metric, as it demonstrates the cost at which Clarus can generate free cash flow. Anything under 20 for this multiple is attractive for us number, which means the 9.04 result may finally be pointing to a long-term bottom in the near term. Despite the fact that sound working capital management (where inventory numbers continue to come down) is obviously crucial for the generation of sustained cash flow, it is also encouraging to see how Clarus' forward-looking earnings revisions have been improving in recent months. As we see below, there has been a significant improvement in Clarus' quarterly earnings estimates in the latter part of the year. Projected EPS growth is bullish for sustained cash-flow generation, especially if these revisions trends continue to gain traction to the upside in upcoming months.

Fundamentals May Be Changing

In the company's outdoor segment, the Black Diamond segment continues its steep growth path, especially in international markets. What investors need to understand here is the potential of this segment, considering that many players are still dealing with the ramifications of the pandemic. Trail running at present for example is growing significantly as we see through the increasing prize money which is entering this sport. The precision segment also continues to hold potential, especially if procurement in general and presently around shell cases can be realized promptly, and more growth avenues can be opened up at scale (Wholesalers, retailers, etc). With respect to the 'Adventure' segment, although present sluggish demand and high inventory levels continue to take their toll on this segment, management will continue to invest in alignment with how long-term trends (such as projected light-truck sales) continue to shape up.

Risks

Given the multi-month trading range in Clarus, investors should use the recent June lows and at worst the stock's December lows of last year as support levels to control risk. Remember, shares remain in a bear market so despite the fact that we think Clarus may be undergoing a bottoming pattern at present, we will not know this for sure until an upside breakout is confirmed. Furthermore, since Clarus is just above micro-cap territory (market cap comes in at $325 million), its trading volume comes in below average. This means that any potential black swan event would affect this stock more than its bigger counterparts. Therefore, long positions should be kept small initially and only added to when a breakout is confirmed.

Conclusion

Therefore, to sum up, encouraging EPS revisions in Clarus which are pointing to almost 18% bottom-line growth this year point to shares beginning to rise here over the near term. Furthermore, the company's forward free-cash-flow multiple of under 10 and strong runway for growth in Clarus' respective segments further demonstrate that downside risk appears limited now in this play. We look forward to continued coverage.

For further details see: