Seeking Alpha reports that the share price for American Outdoor Brands (AOBC, which includes Smith & Wesson and Crimson Trace) has cratered, down 40% from this year’s pre-Q4 report highs. Investors are punting after Ruger’s “terrible earnings report” and AOBC’s “dreadful guidance.” The markets reckon the “Trump Slump” — caused by a lack of fear of gun control — will continue to take its toll on AOBC for the foreseeable future. Seeking Alpha’s Samuel Smith and I disagree . . .

Smith’s analysis centers on the expanding market for firearms, finding reasons to be cheerful within the growing popularity of firearms amongst minorities and women reported by Pew Research and the National Shooting Sports Foundation. A trned that does not depend on fears of gun control.

Based on population growth projections as well as gun ownership research, we can approximate a conservative baseline (i.e., non-politically-charged) annual demand for firearms over the coming few decades. We assume census-projected annual adult population growth of 0.9% (0.5% among Whites, 1.7% among Hispanics, and 0.75% among Blacks), and demographic and age gun ownership percentages identical to the trends revealed in the Pew Research poll. Additionally, we assume that while existing Hispanic adults own firearms at the 20% Pew Research poll rate, new Hispanic adults purchase firearms at the 30% rate indicated by the aforementioned research . . .

Given even this very conservative model which projects catastrophic drops in profitability for the company, shares of AOBC are still heavily undervalued (projected to return a long-term annual average of 20% at present prices). The P/E of 7.26 gives the company a great opportunity to buy back vast amounts of shares to drive long-term shareholder returns even if no attractive acquisition opportunities present themselves, Democrats never regain political power, and no geopolitical events push firearms sales back towards 2016 levels.

AOBC might also use its cash/credit to continue making acquisitions in the firearms and outdoor spaces (e.g., Gemini Technologies’ suppressors), spreading the risk away from firearms in the same way that Vista Outdoors has done, while avoiding the management failures of a similarly diverse Remington Brands.

Which reminds me: Vista’s depressed stock price — hurt by declining ammo sales and a massive acquisitions write-off — accounting for 50 percent of the mothership’s turnover — also looks like a good long term play. Agree?

 

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19 COMMENTS

  2. I have head a lot of sob stories about the “Trump Slump” from local gun stores but no one should have pity on an industry that had record sales for years during the Obama Admin but now ‘say woes as me’ because the fear driven sales have subsided. It is the nature of any sales business that sales ebb and flow.

  3. Government intervention in marketplaces—Obama’s gun control efforts were just that—introduced distortions that will just have to work themselves out.

    • You gotta think though, that maybe they tried to blow up the market just to have this later implosion.

      Buy Guns / Buy Ammo / F the evil (D)

  4. I would need to do more analysis but I think more free fall is in order. Wait.

    I expect a price floor between 10 and 12 dollars. The floor may be higher but if it goes that low I’d be buying.

    • Agreed. Price in Dec ’12 wavered between $8 and $10. If it gets THAT low, I’m in as well. Otherwise, I’d wait until the 90-day (or even 180-day) SMA starts to turn up again before considering it. (totally ignoring any other factors, like P/E, management, etc.)

      And for the record, Seeking Alpha has been telling me to sell Control4 since March ’15. It has doubled since then. Always do your own research. 🙂

  5. Calling this a slump implies that gun sales are “bellow normal”. The record setting sales that gun business has been enjoying was artificially generated. We are now simply returning to normal or finding a new normal.

  6. Guns sales have declined from abnormally high levels, but haven’t declined catastrophically. What have declined catastrophically are the unreasonable expectations that drove speculators to dump tons of cash into firearms stocks.

    The speculators were hoping to turn a quick buck after a Hillary election. They were disappointed, and they have been and are still bailing out, hoping to save their asses.

    We don’t have a “Trump Slump,” we have is a return to normalcy. The industry is on track to match 2012 (pre-Sandy Hook) sales levels, which were very good. Did any intelligent human being really expect panic buying to go on and on forever?

    There’s an old saying on Wall Street: Bulls make money; Bears make money; Pigs get slaughtered. Behold, the wisdom of the ages!

  7. NICS numbers posted from Jan to July 2017 may look a little down some from 2016. July being the low point at 1.7 million, the high 2.4 million back in March. However 2017’s numbers look as if they are trending ahead of 2014 and all previous years.

  8. Well, that tells me that if it is undervalued, basically the whole industry, then more private equity would be chasing the opportunity to cash out the last PE firms to have bought in. The question would be, is the underlying property valuable, and is the management competent to manage through the period.

    From a pure management perspective, I’d not want most of the executives to be managing my money, most have a reputation of bad performance when sales are much higher than anticipated, so in this climate, I’m not sure I’d put my money in.

  9. I am NOT criticizing TTAG here, but the original publication used a really bad graph, and it can trick you into misreading the subject you need to understand:
    The TRUTH about STOCK PRICES (That’s a,TTAG joke,Son…)
    The worst thing about the graph is that it can make people lose their money because they didn’t get the understanding they need. Wanna bet your money in the market?
    Never invest in a company until you really, really understand it.
    Find out where this stock was priced before our latest national gun panic pumped up prices last year.
    Find out where the price peaked at the height of the panic.
    Find out ALL the reasons why the price of a stock went up and why it went down,too. It may be that new models are coming out, or old models are about to be recalled, or chief company officers are leaving, or about to be indicted for crimes, or, or, or…
    No one is going to take care of your money but you. Handle with care…

  10. The industry is currently being driven in large part by the AR15. With prices on that platform continuously declining, its no wonder companies aren’t turning much profit. In order to stay competitive, even the big guys have to keep prices low. Eventually, the fly by night dealers much like those who did home loans in the first decade of this century, will vanish as their model is unsustainable. There needs to be a mass extinction of the bottom feeders first before the industry can be healthy again.

  11. Am I the only one who noticed TC Compass rifles selling for $197 after the rebate? TC is a member of this group of companies. I think there’s a ways to go before we hit bottom.

  12. I’ll be holding off on a buy until I see: 1) the price drop 25% below the 52-week moving average, and 2) better fundamentals in the market. I’m on the sidelines until then.

  14. A slight correction, it is an author writing on Seeking Alpha not Seeking Alpha speaking. Seeking Alpha we let anyone publish and anyone does. Many are pumping a stock that they are long in or bashing a stock that they shorted. There are a few people on there that have been shorting Tesla (TSLA) for years. Every article is about how screwed up the company is, that no one wants electric cars, Elon Musk is a con man, etc.

    One guy that is a con man told people to short TSLA at 33. Another guy that calls himself a hedge fund manager with a fun of a whole $5M shorted it at 90. It closed at 349 today. How would you like following those idiots’ advice? You would be broke.

    I am just saying because it is on Seeking Alpha it means absolutely nothing. It is as if someone wrote on TTAG that some very popular gun was a piece of junk. It is an opinion is all. The difference is that many of the writers on Seeking Alpha have a financial incentive to write what they write. Martin Shkreli was a regular contributor. Does anyone think that that guy is honest?

  15. I’d like to see a mutual fund that owns a basket of gun stocks, outdoor gear, sporting goods, and hunting related companies. I’d also get in and wait for an event like Sandy hook or a city riot and see if it pops. Hurricanes have people buy IJ ng guns, ammo and survival gear so the numbers should rise this quarter

  16. I have a bunch of Hillary for President campaign buttons that I’d like to sell too (not really). Price on them is at an all time low as well.

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