|Shares Out. (in M):||55||P/E||11||0|
|Market Cap (in $M):||500||P/FCF||9||0|
|Net Debt (in $M):||160||EBIT||60||0|
American Outdoor Brands Corp (AOBC), known as Smith & Wesson Corp prior to its name change in December 2016, is one of the largest players in the manufacture of firearms and accessories. A number of factors together resulted in AOBC falling from a 2016 peak of $30/sh to its current price of $9/sh. This amounts to just over 5x CY EBITDA, 11x EPS, and a low DD% FCF yield.
To diversify and compliment its firearms business, ABOC has made a number of acquisitions in the outdoor accessories space. These totaled $159mm in FY’15, $211mm In FY’17, and $23mm in FY’18. Together, the nearly $400mm of acquisitions amount to ~60% of AOBC’s current enterprise value of $660mm. This implies a valuation for the core firearms segment of .
AOBC’s valuation reflects very low fundamental expectations and technical pressure as funds have divested holdings in gunmakers, given the rise of focus on socially responsible investing. It does not reflect the value of significant upside optionality that politically driven, fear-based buying could significantly accelerate AOBC’s revenue in the near-term. Lean distributor inventories and a more efficient AOBC operating structure means that any pickup in demand will have an immediate and direct impact on AOBC’s revenue and earnings growth.
During the Obama administration, the threat of stricter gun legislation drove demand for firearms. This culminated in 2016, with the anticipated election of Hilary Clinton. However, the surprise election of Trump immediately removed the consumers’ sense of urgency to purchase guns, given the administration’s hands-off posture toward further regulation. This left gun dealers and retailers with far too much inventory, which was liquidated through aggressive promotions throughout 2017. By early 2018, inventory levels had normalized and have remained low since then, while the promotional environment has also normalized.
The relatively depressed consumer demand which has persisted throughout 2018 has made it feasible for distributors to purchase inventory on a nearly just-in-time basis. There is a broad recognition that they can get whatever they want, when they want it – and this has eliminated the need to carry any excess inventory. As a result, any politically driven demand “shock” should flow through to the manufacturers and directly benefit AOBC.
Going into the 2020 election cycle, gun control will clearly be a key pillar of the Democratic platform. The issue was featured prominently in the first debates held last month. It is likely that no matter the outcome of the elections, the increased political focus that will return to this issue will be supportive of demand for firearms going forward. If Trump loses, that would clearly result in a windfall of demand for the industry, as gun enthusiasts seek to front-run restrictive legislation, whether or not it’s actually ever passed. Therefore, the political environment is turning supportive for AOBC, for the first time in years.
The best indicator of industry growth comes from the FBI’s NICS Firearm Background Checks (here: https://www.fbi.gov/file-repository/nics_firearm_checks_-_month_year_by_state_type.pdf/view). AOBC’s firearms revenue is closely correlated with adjusted NICS. YOY growth has begun to stabilize, albeit at low levels. Compares remain very easy through the Spring of 2020.
Bottom Line: AOBC trades at a depressed valuation on trough earnings. Declines in NICS have stabilized, and AOBC is gaining market share. It's revenue and earnings were up in the FY'19, ended April 2019. The 2020 political cycle offers a near-term catalyst for acceleration in consumer demand for firearms and accessories. Given lien inventories and a more efficient operating structure, AOBC stands to benefit directly and immediately from any pickup in firearm sales.
2020 election cycle