American Outdoor Brands (AOBC)

Key Statistics

Enterprise Value = $670 million

Operating Income = $32.3 million

EV/Operating Income = 20.74x

Price/Book = 1.06x

Earnings Yield = 3%

Price/Revenue = .77x

Debt/Equity = 53%

The Company

American Outdoor Brands is a firearms manufacturer. They sell handguns, long guns, handcuffs, suppressors, and other firearm-related products.

Brands include: Smith & Wesson, M&P, Performance Center, Thompson/Center Arms, and Gemtech brands.

My Take

AOBC is not cheap on an earnings yield or EV/EBIT basis. This is because earnings are at a cyclical trough. Gun sales have been very poor for the last few years, and gun manufacturers have been punished accordingly.

The Obama Presidency was very good for gun sales. Gun enthusiasts bought up guns like crazy because they were worried about Obama imposing new gun regulations. Of course, the regulations never happened. This created a bonanza of earnings, cash flow, and sales for the industry.

At the peak in 2016, AOBC traded at a price/book ratio of 6x. Price/sales was 2x.

Then, the Trump Presidency came along and gun enthusiasts were no longer scared of regulation. Gun sales slowed.

Meanwhile, in the face of slowing gun sales and the recent bear market, AOBC shares were crushed down to below book value. Recently, all stocks have been dumped regardless of their prospects. The stock has also been punished in recent years due to the ESG fad, in which ESG investors don’t want to have exposure to an ugly industry like firearms manufacturing.

Unlike most of the economy, the firearms market now has excellent prospects. Last month, there was a 41% increase in background checks. Due to the Coronavirus panic, firearms sales are surging. I believe they are going to surge beyond the extremes experienced during the Obama Presidency.

This suggests higher multiples for AOBC. I don’t see why the multiple can’t expand back up to a price/book of 6x from its current 1x multiple. It could also expand up to its 2x price/sales multiple, on likely higher sales. I think there is potentially a 200% upside to the stock from current levels. The market seems to be catching onto this quickly. The stock is already up 15% from my purchase price while the rest of the market is going down this week. I expect this to continue.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.