CLAR - Maran Partners - Clarus: We Still Have A Few Hidden Lottery Tickets In This Investment
2023-11-04 04:35:00 ET
Summary
- Clarus Corp. has received an offer of $160 million for its bullet and ammunition segment from its chairman, Warren Kanders.
- The transaction would lift the ESG overhang that accompanies businesses of this type and bring Clarus to a net-cash position.
- Clarus' market cap is $210 million and the company would have net cash of approximately $55 million post-transaction.
The following segment was excerpted from this fund letter.
Clarus Corp. ( CLAR )
Clarus received an offer of $160 million for its bullet and ammunition segment from Clarus’ chairman, Warren Kanders. A situation like this obviously requires a thoughtful approach to managing the conflict of interest, but this transaction would lift the ESG overhang that accompanies businesses of this type and would bring Clarus to a net-cash position, highlighting the extremely cheap valuation of the remaining segments.
Clarus’ market cap is $210 million, and the company should have net debt of around $105 million at year-end before contemplating the aforementioned transaction. Post-transaction, the company would have net cash of approximately $55 million (~25% of the market cap) and an enterprise value of $155 million.
The Outside View
Investors and analysts frequently extrapolate recent results, whether they be positive or negative. Just as our hypothetical CEO in the example above was too optimistic about his results given his inside view, the market can frequently get too negative about a company by utilizing an inside view approach. I believe that may be the case with Clarus today. This myopic approach seems to be leading the market to say that the consumer is weak and Clarus’ recent margins have compressed, and therefore that its margins will be low forever.
What are normalized margins for Clarus’ remaining businesses? The outside view would have us look at a large number of companies in similar industries and examine their average margins over time.
Through this lens, I think that it is not unreasonable to assume that Black Diamond can generate double-digit EBITDA margins at midcycle profitability. While the company targets 15-20% margins long-term (a level that may be informed by too much inside view optimism), in looking at a number of comparable companies, both private and public, we think 10% normalized margins are a reasonable statistical bet. Clarus’ brand, category leadership, and product lines, which includes many products that “save your life” (I don’t think anyone wants to save ten bucks by buying an off-brand climbing harness), give further weight to the fact that it should be able to earn this fairly pedestrian midcycle margin.
If in the next few years Black Diamond can generate this double-digit EBITDA margin on ~$225-250 million of sales, that segment would produce around $25 million of EBITDA. Similarly, Rhino Rack could potentially generate $18-20 million of segment EBITDA, as it approaches a 20% margin on ~$100 million of sales.
Less cash corporate expenses, Clarus would generate ~$40 million of EBITDA in this scenario. This implies the stock is trading for less than 4x normalized EBITDA (and under 0.5x sales). This seems far too low.
As with margins, so too with valuation. Rather than using an inside view to come up with a valuation, we can also turn to the outside view—in this case, over a decade’s worth of comparable transactions in the outdoor industry.
Since 2010, the average comparable transaction in the outdoor industry occurred at greater than 2x revenue. At this rate, Black Diamond Equipment would fetch more than $450 million and Rhino Rack, around $200 million. Together, along with the ~$55 million of net cash that the pro forma company should have, we’re looking at greater than $700 million of value. If Clarus’ remaining brands are just worth the industry average transaction valuation, it would be valued at $19/sh (more than three times the current stock price).
If Clarus’ brands are worth the lowest revenue multiple paid in the table below, CLAR would be valued at $14/sh (more than twice the current stock price).
The Price Asks the Question
What is implied by Clarus at a ~$155mm pro forma enterprise value?
There are many ways of answering this question. Using the average revenue multiple from the table above, Clarus’ current valuation implies that its sales (again, pro forma for the contemplated sale of the bullet and ammo segment) would be just $74mm (rather than the $300mm+ that they are). We can also look at what the overall valuation implies regarding the valuation of the segments. Here are a few possibilities:
I’ll be blunt. Each of these seems absurd. Any of them highlight the deeply discounted valuation. Take the first box, for example. Buy Black Diamond for well less than 1x revenue and get Rhino Rack and Max Trax (recent purchase price: >$200 million) for free.
We don’t use price targets here at Maran. I think they can be too rigid and can lead investors to fail to update their beliefs as often as they should. Instead, I tend to think about probability clouds with respect to intrinsic valuations. There are many possible future sets of growth rates, margin profiles, economic backdrops, and investor sentiment profiles that we could live through over the next few years. It is not a good use of time to specifically guess which path will unfold. But the key is that the starting point positions us so that the vast majority of these paths yield substantial upside.
We already saw that applying the average historical comparable valuation to Clarus’ recent results can yield a triple in the stock price. If Clarus grows Black Diamond revenue to $300 million and Rhino Rack revenue to $150 million over the next three-to-five years, upside is into the high $20s or low $30s.
And while no one wants to think about real upside scenarios during a time like this, let’s not forget that Clarus’ medium-term targets for Black Diamond and Rhino Rack are revenues of $400 million and $200-$300 million, respectively; if they achieve these targets, we could see valuations in the $40s and beyond. Any of these outcomes would be fantastic, but the key is that none of them are close to priced into the current stock price.
Clarus has a history of opportunistic share repurchases, including buying back 10% of the company below $6/sh in 2015-2016 and tendering for stock at $8 in 2018. If Clarus enters 2024 with 25% of its market cap in cash and a stock price anywhere close to where it is now, I wouldn’t be surprised to see it utilize this tool again.
Finally, recall that we still have a few hidden lottery tickets in this investment. Clarus’ lawsuit against HAP Trading continues; a legal victory or settlement could prove meaningful relative to Clarus’ current valuation.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Maran Partners - Clarus: We Still Have A Few Hidden Lottery Tickets In This Investment