Description

Ammo Inc. (“POWW”)

AMMO, Inc. Overview

AMMO, Inc. (NASDAQ: POWW) owns two businesses in the US firearms industry.  Its most valuable unit is Gunbroker.com (“GB”), the largest online platform for firearms and related products in the United States. The second division produces and sells ammunition and munition components for civilian, military, and law enforcement markets.  AMMO has just launched an update to its GB platform which finally allows buyers to purchase more than one item at a time, which should drive significant growth and profitability over the coming quarters and years.  It has also been experiencing improving profitability in the past few quarters, driven by its new management team. AMMO has also invested in expanding its production capacity and enhancing its operational efficiency, which will enable it to continue the ongoing recovery in its ammunition business.

Despite its solid performance and improving outlook, AMMO's stock price has been trading at a significant discount to its peers and industry averages. One of the factors that has weighed on the stock is the ongoing litigation with the current board member who sold Gunbroker.com to AMMO in 2019. The dispute involves allegations of misrepresentation, and the seller is seeking to rescind the transaction and regain control of the online platform. AMMO has denied the claims and filed counterclaims against the seller, seeking damages and injunctive relief. The litigation is expected to be resolved by the end of this year or early next year.  We view the possibility of recission of the deal as non-existent.

We believe that the market has overreacted to the litigation risk and overlooked the underlying value and potential of AMMO's business. We estimate that Gunbroker.com alone is potentially worth more than $400 million, based on its revenue and earnings. This implies that the market is assigning a negative value to AMMO's core ammunition and munition business, which is highly profitable and growing at a double-digit pace. There currently is significant merger and acquisition activity in this sector driven by world-wide demand for ammunition due to the conflicts in the Ukraine and Middle East.  We think the low value currently assigned to this business is unjustified and irrational, given the strong fundamentals and competitive advantages of AMMO's business model.

Below is a summary of AMMO’s highlights:

Gunbroker.com

In 2021, AMMO, Inc. acquired GunBroker.com, the world’s largest online auction and sales marketplace dedicated to firearms, hunting, shooting, and related products for $244 Million using a combination of cash, stock and debt. GunBroker.com allows buyers to find new and used firearms, accessories, and other shooting sports equipment from federally licensed firearms dealers (“FFL” or “FFL’s”).  Each transaction for the purchase of a gun requires the seller to ship the firearm to the FFL dealer of the buyer’s choice where the gun can then be picked up.  The majority of FFL’s are independent shops located across the US.  Historically the GB site had only allowed the buyer to put in and purchase one item at a time in the shopping cart. Recently, GunBroker.com introduced several features including a multi-item cart and a single payment portal to enhance the customer experience. Here are the features:

Multi-Item Cart: GunBroker.com now offers a multi-item cart, allowing users to add multiple items to their cart before making a purchase. This streamlines the buying process and improves convenience for buyers.  Single Payment Portal: The platform also launched a single payment portal, simplifying the payment process for users. With this feature, buyers can complete their transactions more efficiently.

 POWW will receive increased revenue with little to no additional costs from these new features.  Early indications are that both have been well received.

The growth of online marketplaces like GunBroker.com has transformed how consumers buy firearms and ammunition. The convenience of online shopping and the ability to compare prices and products have contributed to this trend.  This is reminiscent of how EBAY helped transform the sale of collectibles and other items sold by smaller independents.

The three most similar publicly traded companies to GB are Shopify (“SHOP”), Etsy (“ETSY”) and EBAY (“EBAY”).  These three companies are valued at a median EV/EBITDA multiple of 12 times 2024 and 11 times 2025 estimates.  Table shown below:

Applying a 2-turn discount multiple for GB due to its smaller size would yield value for GB of between $388 million and $414 million, which is greater than the current $287 million enterprise value of POWW.  Both sell-side analysts I spoke with gave GB have not accounted for the benefits of the site enhancements in their projections.  The analysts’ main focus of fiscal 2025 growth is on centered on the 2024 is a presidential election year, which is a cycle that has historically spurred firearms and ammunition sales due to the fear that the incoming administration would limit availability of these items to buyers.

Please note that gross merchandise moved over the GB site is over $1 billion and that GB only reports the fees it charges in its revenue line.

GB financial table shown below:

Ammunition Manufacturing

Ammo has invested ~$30 million during FY 2022 and 2023 in a new manufacturing facility that greatly increases its capacity. In particular, it has added a new capability for producing 50 caliber brass shell casings. Manufacturing these larger calibers is exponentially more difficult than making more common calibers like 9mm pistol ammunition.  The diagram below shows the components of making these products and the steps needed to make a high quality rifle shell.

These products carry much higher margins due to the difficulty of the manufacturing process. For this reason, POWW management is focused on ramping up large caliber brass production while deemphasizing the production of pistol ammunition. This results in lower revenue but significantly higher profit margins as 9mm bullets are a commodity item that requires very large-scale productions and a large degree of vertical integration of ammunition components to be profitable. This has carried a very low or negative margin for AMMO over the last few years.

In the third calendar quarter of 2023 AMMO experienced a manufacturing issue with one of its most important presses used in the production of large caliber brass. Due to supply chain issues at the time this caused production delays that lasted into late calendar 2023. This issue is now fully resolved and POWW has sufficient orders on hand to absorb all its current production. POWW has indicated that there is significant pent-up demand available for this work and expects to begin increasing sales as it ramps up production. The company expects to add shifts to increase this production during the next few quarters.

The ammunition business at POWW was run poorly prior to the hiring of the current CEO, Jared Smith.  Mr. Smith joined the Company from Fiocchi Munizioni, one of the world's leading ammunition manufacturers.  Mr. Smith was the general manager of Fiocchi’s US business and has worked in the industry since 2010.  He has successfully transitioned POWW away from low margin small caliber ammunition manufacturing and into higher margin products.  This fact was masked in 2023 by the supply chain issues that delayed large scale production of the brass rifle casings.  This issue has been solved and calendar 2024 and 2025 will show profitable production and increasing volumes.

Ammunition EBITDA was negative $9 million and $9.5 million in fiscal years 2023 and 2024, respectively as the company struggled with high inventories of 9MM ammunition. Much of this production ended up being sold at a loss.  Fiscal 2025 (3/25) will begin show the benefits of Mr. Smith’s clean up of the older business and shift to high brass shell casing production as the supply chain issues have been fixed in the early part of calendar 2024.  One sell-side analyst has the ammunition segment generating $6.5 million in EBITDA for fiscal year 2025.  This is despite the poor start of the year from the supply chain issue.  In fiscal year 2026 POWW should be able to generate well in excess of $10 million in EBITDA.  Vista Outdoor’s (“VSTO”) Kinetic Group (“KG”) has a $1.96 billion bid for its business.  KG has trailing EBITDA of $100 million and is one of the leaders in the ammunition space.  This values KG at 19.6 times twelve months EBITDA. 

The POWW ammunition segment has approximately $180 million in assets and is probably worth somewhere between that number on the high side and $50 million (5 times Fiscal 2026 EBITDA) on the low side.  We think a $100 million valuation, just below the mid-point, is appropriate for this business.

Ammunition Market Analysis

AMMO, Inc. operates in a dynamic market influenced by various factors:

Demand Surge: The US ammunition market has experienced increased demand due to various factors, including political uncertainty, social unrest, and concerns about personal safety. These factors have driven more people to purchase firearms and ammunition.  Due to international conflicts in the Ukraine and Israel, the world has a significant deficit of rifle shells.  Demand for high quality brass shell casings currently is running well ahead of supply. Even when these conflicts end, militaries will need to meaningfully restock their inventory.

Supply Chain Challenges: Like many industries, the ammunition market faced supply chain disruptions during the pandemic. Shortages of raw materials, labor, and transportation impacted production and availability.

Legislation and Regulation: Changes in gun laws and regulations at the federal and state levels directly impact the ammunition market. For instance, discussions around background checks, magazine capacity limits, and other restrictions affect consumer behavior.

Competition: AMMO, Inc. competes with other ammunition manufacturers and distributors. The company’s ability to innovate, maintain quality, and meet market demands will determine its success.

Valuation

We are bullish on AMMO's stock and have a target price of over $4.37 per share. This represents an 71% upside from the current price of $2.55 per share. We expect that AMMO can generate about $45 million in adjusted EBITDA in FY 2025 (end 3/31/25). With a market cap of $302 million, net cash of $19 million the company has an enterprise value of $283 million which implies a 6.2 times EBITDA multiple. Ammunition maunfacturer mulitples are currently well above that EBITDA multiple as VSTO’s Kinetic Group has a 19.6 times EBITDA offer outstanding.  The worldwide shortage of rifle ammunition is not ending anytime soon and we believe that POWW’s ammunition business could fetch a 10 times EBITDA multiple for a $100 million value.  We believe that the GunBroker marketplace business with its +85% gross margins deserves a high multiple. Given GunBroker’s growth rate, margin and cashflow contribution we believe that a 10x multiple for this unit is appropriate. This would imply a value of about $400 million for the GB segment and this combines for a $500 million enterprise value at a stock price of $4.37

In conclusion, AMMO, Inc.'s acquisition of GunBroker.com positions it well in the online firearms marketplace. The company’s focus on innovation and customer experience, along with the recent platform enhancements, will likely contribute to its continued success. We believe that AMMO is an attractive investment opportunity that offers a compelling combination of growth, profitability, and value. The company has a diversified portfolio of products and services that cater to a large and loyal customer base across various segments and geographies. The company also has a strong balance sheet and cash flow generation that allow it to invest in its growth and reward its shareholders. We think that the current stock price does not reflect the true worth and potential of AMMO, and that the litigation issue is a temporary and manageable challenge that will not materially affect the long-term prospects of the company. 

Catalyst

1.  Gunbroker.com new shopping cart and purchase interface allows for multiple items per cart versus only one!  Enough said.

2.  Industry consolidation in the ammuition sector due to world wide shortages of all components of ammunition, especially rifle cartridges.

3.  End of legal battle with Steve Urvan, which is a nuisance and costs POWW $.