AMRK - A-Mark Leads Integrated Downstream Precious Metals Market Enabling Broad-Based Growth

2023-08-15 12:51:01 ET

Summary

• A-Mark Precious Metals reports Q3'23 revenues of $2.32bn, a 9.86% increase.
• AMRK's integrated platform and diversified revenue base contribute to its growth strategy.
• AMRK has acquired a quarter million customers through DTC expansion and M&A activity.

A-Mark Precious Metals ( AMRK ) is an El Segundo, California-based precious metals trading company, with operations across direct-to-consumer precious metals, wholesaling, minting platforms, logistical services, and secured lending practices.

Through these activities, AMRK has achieved Q3'23 revenues of $2.32bn- a 9.86% increase- alongside a net income of $35.92mn- a 3.91% decline- and a free cash flow of $63.06mn, up from -$297.16mn a year earlier.

Introduction

At the core of AMRK's growth strategy remains its highly integrated, decentralized platform, and diversified revenue base. AMRK maintains a significant presence across non-mining, downstream precious metals activities with its range of brands, including, but not limited to JM Bullion, the largest US precious metals retailer, a nearly 50% stake in Canada's largest precious metal retailer SilverGoldBull, Goldline- a higher margin premium servicer, online pricing resources such as GoldPrice and SilverPrice, and specialty brands focusing on mints, coins, specific metals, regions, and so on.

This integrated strategy enables greater upselling and cross-selling opportunities alongside a measure of resilience and growth; AMRK has seen the acquisition of a quarter million customers through DTC expansion, with accelerated customer base growth and digital offerings- including CyberMetals platform- driven by synergetic M&A activity.

The combined accretive effect of AMRK's superior operational strategy, a steep undervaluation, and the firm's aggressive capital deployment objectives lead me to rate the firm a 'strong buy'.

Valuation & Financials

General Overview

In the TTM period, AMRK's stock- up 2.85%- has experienced poorer price action to both TradingView's Brokerage Index- up 14.22%- and the broader market as represented by the S&P500 ( SPY )- up 6.11%.

The brokerage industry's relative overperformance is driven by industry titan, Charles Schwab, and its strong Q2 quarterly report. However, although AMRK has continuously beaten earnings, the firm is prone to greater equity price volatility, oscillating above and below market averages with shifting precious metals and retail activity.

However, with rising interest rates and lower disposable income, investors may be anxious about the daily volume of wholesale and retail demand for AMRK products.

Comparable Companies

The downstream precious metals market remains highly fragmented, with a majority of AMRK's peers either privately run or operating as subsidiaries of larger, diversified firms. As such, I sought to compare AMRK to similarly sized upstream precious metals companies, which operate with broadly the same demand and supply dynamics. This group includes Idaho-based diversified precious metals miner, Hecla Mining ( HL ), gold-focused i-80 Gold ( IAUX ), and the world's 7th largest silver miner, Coeur Mining ( CDE ).

As demonstrated above, AMRK has experienced the second-best YoY price action, likely a product of the firm's lower sensitivity to commodity prices relative to the peer group and stronger general earnings.

Despite this, I believe AMRK has superior built-in returns due to its multiples-based value, ability to capture growth, and willingness to return cash flows to shareholders.

For instance, the company maintains the lowest trailing and forward price-to-earnings ratio alongside best-in-class P/S and P/CF ratios. Along with the highest book value per share and lowest debt/equity, AMRK manifests outsized financial strength across all three financial statements.

Moreover, the firm is able to effectively leverage its financial position for growth, with the highest 5Y return, 5Y earnings growth, ROE, and ROA.

Investors can expect this growth to translate to profit since AMRK promises the highest dividend relative to peers, with a disciplined dividend payout ratio and the utmost dividend growth, exemplified by AMRK's 566.67% 5Y dividend growth.

Valuation

According to my discounted cash flow valuation, at its base case, the net present value of AMRK is $53.83, meaning at its current price of $36.51, the stock is undervalued by 32%.

My model, calculated over 5 years without perpetual growth built-in, assumes a discount rate of 9%, balancing the company's low debt levels and higher equity risk, owing to higher price volatility. To remain conservative, I estimated a forward 5Y revenue growth rate of 6.5%, similar to its 5Y trailing average revenue growth, which was distorted downwards by a major single-year decline in 2019.

Alpha Spread's multiples-based relative valuation more than corroborates my thesis on AMRK's heavy undervaluation, estimating a base-case fair value of $209.81, with the company undervalued by 83%.

However, Alpha Spread's model fails to account for equity price volatility, which may misrepresent price-based ratios and does not discount dividends.

Thus, taking a weighted average skewed towards my calculated net present value and putting less weight on Alpha Spread's relative valuation, the fair value of AMRK is $64.60, a 43% undervaluation.

AMRK is Positioned to Take Advantage of Retail Metals Trading Growth

Fundamental to AMRK's growth initiatives is the development of its customer base through a diverse range of brands operating across the downstream precious metals continuum. By owning or running significant stakes in specialty precious metal brands and offering the premiere pricing and precious metal market resources for investors and individuals, AMRK upsells its core propositions of retail and wholesale precious metals through JM Bullion and the higher margin Goldline brand.

The latter operational blueprint feeds into AMRK's DTC expansion, CyberMetals expansion, and cross-selling opportunity objectives. Through DTC expansion, AMRK is able to effectively vertically integrate, a margin-expanding approach which also supports AMRK's geography-centric acquisition growth strategy. Additionally, with the growth of CyberMetals, AMRK is able to expand its foray into financial services, from secured lending to wealth management and other institutional and more secure cash flows.

All of this ultimately supports a synergistic growth opportunity for AMRK, able to opportunistically expand its minting business, design business, and no-loss financial services capabilities.

Wall Street Consensus

Analysts largely echo my highly positive view of AMRK, projecting an average 1Y price target of $53.00, a 45.17% increase.

Even at the minimum projected price target of $45.00, analysts see an upside of 23.35%, reflecting Wall Street's opinion that the market has largely overreacted to potential headwinds to AMRK's model.

Risks & Challenges

AMRK's Movements Are Highly Privy to Commodity Price Swings and Market Volatility

Although AMRK generally responds to precious metal price shifts less dramatically than similarly-sized upstream peers, the company nonetheless experiences outsized price volatility in relation to both commodity prices and general macro uncertainty, such as interest rates and black swan events. As such, investors should price in higher equity risk premiums, with cyclical swings leading to significant gains or losses for investors.

Rising Interest Rates or Shifting Demand Structure May Reduce Operational Cash Flows

AMRK maintains a high level of fiscal discipline, with a low debt/equity ensuring the company does not face large cost inclines with higher interest rates. However, aside from investment demand from asset managers and central banks, the greatest demand for precious metals remains in the retail jewelry market. The said market remains a luxury one, seeing reduced expenditures as incomes fall and rates rise. As such, sustained high interest rates or a decline in the use of gold as an asset may lead to long-run margin compression and scalability concerns.

Conclusion

Going forward, AMRK remains an underpriced market leader in the downstream precious metals market, a presence enhanced by integrative growth, vertical expansion, and generally well-informed positioning, ensuring superior risk-adjusted returns for years to come.

For further details see: