AOUT - American Outdoor Brands: An Appealing Risk-Reward Setup (Rating Upgrade)

2023-12-25 02:18:08 ET

Summary

• AOUT stock has underperformed but now presents a good risk-to-reward setup and cheap valuation.
• Q2 FY24 results showed sales growth, increased advertising, and positive customer response to MEAT brand products.
• Technical analysis suggests a bullish reversal with support around $7, making it a good opportunity to buy.

I last wrote on ( AOUT ) in July, and I felt that there was no reason to buy it. Its stock price has fallen around 4.5% since then, underperforming compared to the market standards. However, I think the current picture of AOUT looks good, and it can be rewarding in the coming times. It provides a good risk-to-reward setup, and its valuation looks cheap. Hence, I am upgrading my rating to buy.

Financial Analysis

It recently announced its Q2 FY24 results . The net sales for Q2 FY24 were $57.9 million, a rise of 6.4% compared to Q2 FY23. Its traditional channel and e-commerce sales increased by 8.7% and 3.3% in Q2 FY24 compared to Q2 FY23. The major reason for the sales growth was higher demand for its outdoor lifestyle category products, especially its hunting products. The outdoor lifestyle category products sales increased by 14.3% in Q2 FY24 compared to Q2 FY23. Its gross margin for Q2 FY24 was 45.7%, which was 47.7% in Q2 FY23. The main reason for the decline was higher promotional activity.

Its net income for Q2 FY24 was $77,000, which was $370,000 in Q2 FY23. Honestly, I am impressed by the results. The company exceeded the expectations and tackled the inflationary challenges through increased advertising, which worked for them. In addition, its MEAT brand products are getting positive responses from customers. It recorded the highest single sales day on Cyber Monday. The biggest positive that I see in AOUT is that it has no debt and has $8.3 million in cash, which the company has been using for innovation purposes and share repurchases. A healthy cash position will allow them to develop and innovate new products that are essential to growth in the market.

Technical Analysis

It is trading at $8.5. I see some positives here in the chart of AOUT. The stock has been bearish for the last three months and is continuously falling. It fell around 12% in the last three months, but the stock stopped falling when it touched the $7 level. It is the same level that the stock has taken support two times in the past. So, it is an important level for the stock, and it shows that buyers are active around the $7 level. If we look at the most recent candle, it is like a pin bar, which is a bullish reversal candle. So, looking at the buying strength around the support zone, I think the downside risk is low, and the risk to reward is also favorable. Therefore, I believe that now would be an excellent opportunity to begin bottom fishing in this stock.

Should One Invest In AOUT?

Last time, I was hesitant and didn’t see any value in AOUT. However, after the decent results, healthy cash position, discounted share price, and favorable risk-to-reward setup, I think it can be rewarding. In addition, its valuation looks cheap now. AOUT has an EV / Sales [FWD] ratio of 0.66x, which is lower than the sector median of 1.25x, and has a Price / Sales [FWD] ratio of 0.57x compared to the sector median of 0.94x. So, the valuation also looks favorable. Hence, I believe ignoring AOUT at the current price level is tough. It was struggling the last time I covered it, and I was concerned about slow sales growth, but the company is seeing good growth in its e-commerce and traditional sales. So, considering all these factors, I think AOUT might be a good buy now. Hence, I changed my hold rating to a buy.

Risk

Many factors can cause volatility in the costs and availability of components, finished goods, and raw materials needed for their products. These factors include labor costs, production levels, competition, consumer demand, and import duties. Their capacity to obtain and afford these things may be severely impacted by this volatility, which could have an adverse effect on their operations, financial situation, and business. They may have to pay more for supplied goods, parts, and raw materials as a result of their contract manufacturers' exposure to labor cost fluctuations, pricing volatility, and other inflationary pressures. They might not be able to pass on any share of price increases to customers at times when prices are growing. On the other hand, if prices fall, consumer requests for a reduction in price may lead to a drop in sale prices and, if any inventory is already on hand, a reduction in profits. Therefore, changes in the cost of components, completed goods, or raw materials could significantly negatively impact their operations, financial health, and business.

Bottom Line

AOUT is offering a good risk-to-reward setup with a good valuation. Its quarterly results showed strength, and e-commerce and traditional sales saw growth, which is a positive sign. If it continues like this, then we might see decent sales growth compared to the previous year. In addition, its share price is near an important support zone, which can be a good buying opportunity. Hence, I changed my hold rating to a buy.

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