AMRK - A-Mark Precious Metals Continues Creating Value

2023-05-19 11:03:11 ET

Summary

• A-Mark Precious Metals topped analyst expectations with their third quarter report, with top and bottom-line beats.
• The company has increased focus on capital returns in recent quarters, with both regular dividends commencing and initiating share buybacks.
• A-Mark looks poised to continue creating value for shareholders as demand for bullion products remains hot.

It's been 7 months since my last update on A-Mark Precious Metals (AMRK). Since October, the stock is up 25% despite some extreme interim volatility. At a high level, the investment thesis is unchanged, but I wanted to provide a few key updates on important evolutions in the business since October.

Update #1: Bank Runs

It turns out, despite the heightened demand for gold and silver since early 2020, the biggest catalyst for precious metal demand in the last few years was the bank runs in March. Peers SD Bullion , APMEX , and Miles Franklin all reported record demand in the ensuing weeks, and both SD and APMEX had to institute order minimums to get through the deluge of retail buying.

A-Mark was the only supplier I follow that didn't feel the need to put a floor on order levels, and I hope this results in market share gains. With only a couple weeks of demand pulled into their third quarter, A-Mark beat earnings expectations last week ( beaten EPS estimates 10 out of last 12 quarters ) and described the business as "firing on all 12 cylinders" on the earnings call . With the debt ceiling looming large, questions about the dollar's reserve status, and bank fears lingering, A-Mark is poised to continue to profit from both real and imagined macro dangers.

Update #2: Capital Allocation

A-Mark reinstated a $0.20/quarter dividend during 2022, after last suspending regular dividend payments in 2018. There were some nice special dividends along the way, and it was nice to see commitment to a regular return of capital.

The situation escalated this February, when A-Mark began using their share buyback for the first time since authorizing it in 2018. The firm has authorized repurchase of 1m shares and 336k shares were repurchased in Q3 for an average price of about $29/share. Interestingly, the majority of repurchases took place in February, before the bank run panic boosted bullion demand to the stratosphere. I am encouraged that Management sees value in buying back shares at $29 during more muted periods of demand.

Update #3: M&A

There are a couple M&A updates since my last piece:

• BGASC was closed at the end of October - this acquisition seems likely to have already paid for itself and is performing well, per call transcripts.

• A-Mark acquired 12% of Texas Precious Metals in January for $5m. This acquisition appears to be a natural expansion of A-Mark's exposure to e-commerce, minting, and private storage.

• Lastly, A-Mark announced an agreement to purchase 25% of Atkinsons for $2.75m , though no subsequent closing has been announced. This deal increases A-Mark's exposure to the UK market and includes an option to increase their ownership to 49.5%.

While none of these deals significantly move the needle, they represent strategic expansion of A-Mark's asset base at very reasonable valuations. Management indicated on the Q3 call that many M&A opportunities are present, and I would expect more announcements soon.

Expectations For The Fourth Quarter

Street estimates for A-Mark's Q4 earnings remain under $2/share , and the GAAP estimate actually remains under Q3's $1.46, at a mere $1.39. While Q3 only benefited from a couple weeks of elevated bank run demand, Q4 should experience the full benefit of sustained, heighted spreads. It will be about four months until A-Mark reports, but I'll provide a high-level framework for what I expect from the quarter:

• A-Mark said on their Q2 call they were three months behind on wholesale orders, and I assume the backlog has gotten worse, not better. Wholesale margins have been hovering around 1.8%, and I'll assume a slight bump to 2% given the recent demand spike. I'm also assuming a slight revenue bump due to higher metals prices. $1,600M at 2.0% margin = $32m gross profit.

• Retail sales will be tougher to predict, as further demand bumps during Q2 will start with lower inventory and higher premiums than before. Basic silver rounds on JMBullion are currently selling around $5 over spot , and Silver Eagles are commanding nearly $20 over spot price . JM achieved 10% gross margins in late March 2021 when premiums were much narrower. I therefore expect gross margins to increase versus the 8.3% in Q3 and volumes to increase as well ($522m Q3 revenue). With higher average gold and silver prices, I'll assume $600m of Q3 DTC revenue @ 10% margin = $60m gross profit.

• There should be ~$24m of SG&A, $3m D&A, $4m net interest expense, and $15m taxes. I would also expect $5m or so of earnings from equity method investments, resulting in net income around $50m (+20% vs Q3), over $2/share before adjustments. EBITDA would therefore be almost $75m.

I want to use higher expectations for retail gross margins given how elevated premiums are at this time, but the quarter isn't over and the exact mix between JM Bullion sales, higher margin Goldline, and lower margin BGASC is tough to predict. For now, I'm comfortable expecting results to clear analyst estimates once again.

Valuation

My valuation framework remains the same from my prior piece. A 15x multiple on normalized cash flow ($75-100m) seems to be a fair valuation for a compounding business with attractive reinvestment options. Using 25m fully diluted shares, this generates a $45-60 target price. Davidson and Northland maintain $57 and $56 price targets on the stock and B. Riley $54, in line with my approach.

Risks

A-Mark is subject to counterparty risk in their hedging program, but I though their answer on the Q3 call was instructive to the mitigation they have implemented for that risk. They also post somewhat lumpy revenue and earnings results, which are not viewed favorable by public market investors, creating a risk A-Mark will continue to trade at a discount to my expected fair value. With their buyback program underway, I hope this risk becomes a tailwind for the stock price.

Lastly - relationships are core to A-Mark's business. If they lost a key relationship with a counterparty or a sovereign mint, it could materially harm their operations.

Conclusion

A-Mark Precious Metals is relentlessly growing their business and benefits from various market panics. I have been thoroughly impressed with Management's execution and am excited that capital returns are starting in earnest. The business is dominating the North American bullion space and laying the foundation for continued success.

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