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?