2023-10-27 11:51:46 ET
Summary
- AMMO, Inc. is a small company in the firearms industry, known for its online presence and as a manufacturer of ammunition and casings.
- The company has experienced slower growth recently due to market conditions and a strategic choice to prioritize higher margins over revenue.
- The valuation of AMMO is not low, but the company has low debt and cash reserves for potential acquisitions.
AMMO (POWW) might be a small company, but it certainly holds its weight in its industry, effectively being eBay for firearms. Born in 2016 within an already fiercely competitive market, it quickly established itself both as a manufacturer of ammunition and casings and for its online presence. However, after strong growth over its first five years, it seems that in recent quarters, the company has lost some of its expansion momentum. This is partly due to the slower growth rate of the market in which it operates, and partly due to a strategic choice aimed at obtaining higher margins, even if it meant sacrificing some revenues.
Having deeply analyzed the business model, financials, and its valuation, I believe the most accurate rating to initiate my coverage of AMMO is HOLD. My investment thesis revolves around three key points:
- The current company valuation isn't outrageous, but it's also not low considering the multiples and future prospects.
- The company is undergoing a risky transformation concerning its manufacturing business, with limited information provided by the management about future prospects.
- Their e-commerce business ( gunbroker.com ) boasts a market-leading position, but its user growth rate is quite low, and there are limited options to enhance the value for existing customers.
Throughout this analysis, I'll delve into these points individually.
AMMO, Inc.: Business Model
AMMO operates primarily across three segments:
- OEM production of brass casings.
- The firearms trading website, gunbroker.com.
- Selling branded complete ammunition.
The OEM production of brass casings is where the company has chosen to focus its future efforts. While it's not the segment with the highest revenue potential, it's where the company achieves the best margins. All production takes place at their owned 185,000 square-foot facility in Wisconsin.
Gunbroker.com is a longstanding site, a global market leader in firearms trading, and currently ranks 699th among the most visited websites in the US according to Similarweb . AMMO acquired it in 2021, and in the last quarter, it contributed $13.9 million in revenue, accounting for 42% of the total. The company earns a commission on all transactions within the site and sells advertising to vendors looking for more prominent ad placements.
Selling their branded ammunition has been the more challenging segment for AMMO recently, even though historically, it was the biggest revenue contributor. The company has openly admitted to struggling with competition on price against rivals like PMC and Sellier & Bellot, while the premium market is crowded with brands such as Remington, Sierra, Barnes, and Hornady.
A Look at the Financials
Below, I've detailed the most pertinent data to understand AMMO, Inc.'s current situation. (Data in $ million, source: Seeking Alpha)
Mar 2018 | Mar 2019 | Mar 2020 | Mar 2021 | Mar 2022 | Mar 2023 | TTM | |
Revenues | 2.3 | 4.2 | 14.1 | 58.2 | 225.6 | 181.6 | 157.6 |
Revenue growth | 82.61% | 235.71% | 312.77% | 287.63% | -19.50% | -13.22% | |
Gross profit | 0.1 | -0.2 | -3.7 | 11.4 | 89.2 | 55.7 | 51.5 |
Gross profit margin | 4.35% | -4.76% | -26.24% | 19.59% | 39.54% | 30.67% | 32.68% |
Operating income | -5.1 | -9 | -14 | -4.4 | 37.1 | -2 | -6 |
EBITDA | -4.9 | -8.4 | -9.6 | 0.5 | 54.5 | 15.5 | 11.8 |
Cash from operations | -4.8 | -7.3 | -5.4 | -14.4 | 2.9 | 35.6 | 43.3 |
Net income | -5.1 | -11.7 | -14.6 | -7.8 | 33.2 | -4.6 | -8.9 |
Unlevered FCF | - | -6.2 | -0.7 | -19.8 | -25.9 | 16.5 | 28.7 |
Total debt | 0.1 | 10.4 | 14.3 | 10.6 | 5.1 | 14.9 | 14.6 |
Cash & Equivalents | 4.4 | 2.2 | 0.9 | 118.3 | 23.3 | 39.1 | 47.5 |
It's evident that two significant leaps in revenue came in 2021 after acquiring Jagemann Stamping Company's brass casing division and in 2022 with the acquisition of Gunbroker.com. It's worth noting that the company is currently in its Q2 2024 due to an unusual fiscal calendar where each fiscal year ends in late March.
It's also observable that while revenues have recently declined, the gross profit margin has benefited. Last quarter, the gross profit margin even reached 42.9%, primarily because of the revenue mix shift towards brass casing and less focus on ammunition. At the same time, revenues dropped by 42.0%. While this strategic move might help stabilize the profitability and cash flow production, it essentially bounds AMMO within a market generating considerably lower revenue compared to ammunition. This shift also minimizes synergies between Gunbroker.com and the manufacturing business, whereas previously, the company spoke of using e-commerce data to anticipate consumer demand for ammunition.
On a positive note, the company has very low debt and over $47 million in cash and equivalents, which could potentially lead to exciting new acquisitions.
Valuation
Below, I've sourced from Seeking Alpha, the main data related to Ammo Inc's valuation compared to the industry average.
The only two metrics that seem to suggest an attractive valuation are the price/book ratio and the price/FCF. However, the former is influenced by the fact that the company has reported $90.9 million of goodwill and $125.5 million of other intangibles from the acquisition of Gunbroker.com and ammunition patents on their balance sheet.
One might think that a sum-of-the-parts approach would justify the company's valuation, but that's not exactly the case. Gunbroker.com is generating lower revenues, and the discount rates for future cash flows are much higher than when AMMO purchased the site for $250 million in 2021. At the same time, the company has decided to focus on the brass casings component in its manufacturing activities. Therefore, it's not fully leveraging the value of its ammunition patents and has not sold the licensing rights. Consequently, I believe that, from an accounting standpoint, the book value might be considerably higher than the actual realization value one would get from selling Gunbroker.com or the ammunition patents today.
Regarding the price/FCF, the trend of free cash flow has been quite erratic over recent years. However, the production of cash flows is undoubtedly improving with the shift in the product mix, and this is one of the variables I will consider more closely in the upcoming updates of my analysis.
Uncertainty Factors
In my view, two uncertainty factors weigh on the prospects of POWW shares right now: a progressively weaker performance of gunbroker.com and unclear prospects regarding the change in manufacturing strategy, which could either prove to be a brilliant idea or a complete disaster.
1. Warning Signs for Gunbroker.com
Management hasn't hidden this in recent earnings calls: gunbroker.com's performance is stumbling. The site has lost its position in Similarweb's American top 500, currently ranking 699th. Meanwhile, as evidenced by Google Trends, the acquisition of the site occurred right at the peak of user interest, and since then, interest has been waning.
Semrush data, which fairly accurately estimates the trend in organic traffic received by Gunbroker.com , confirms that the user base is dwindling. Unfortunately, management hasn't provided any MAU (Monthly Active Users) numbers in the last quarters. Their silence leads me to believe that the data might have been rather negative; otherwise, there would have been no reason not to share it with the shareholders.
2. No Guidance on the Strategic Shift
Management believes that the right path is to focus manufacturing activities on brass casings due to higher margins and non-competitive production costs in the ammunition sector. AMMO will not leave the ammunition market, but the goal is to have casings account for 25-35% of the company's total revenues by the end of the year.
The fact that margins have significantly improved in recent months is undeniable. However, AMMO owns a 185,000 square feet facility that must be utilized somehow: it would be very useful to have revenue forecasts that management expects from casing production in the coming years. Considering the ammunition market's CAGR is estimated at around 3-4% until 2030, the market share must be taken from competitors because the market itself is growing at a rather slow pace.
It should be noted that the latest earnings call did not provide particularly encouraging data regarding casings.
Mike Zabra: "Got it. And given that loaded AMMO demand is still relatively soft across the entire industry, how should we think about pricing for Shell casings? Are we having to compete on price here at OEMs? Or is press relatively stable for casings?"
Jared Smith: "Prices -- we reentered into this market in a declining market. So, I would say right now and for the foreseeable future, price is very stable."
Conclusions and Final Thoughts
AMMO's valuation in terms of multiples and balance sheet data is certainly not low, and at the same time, there are uncertainty factors weighing on the two segments the company is focusing on the most. However, in recent quarters, the ability to produce cash flows has significantly improved, and I believe this can improve further in the coming quarters.
For now, I believe that the improvement in cash flow generation capacity is balancing the downsizing of Gunbroker.com from a valuation standpoint, and management deserves the benefit of the doubt regarding the choice to focus on casings. As a result, HOLD is the rating I find most appropriate for AMMO shares at this time. It will be interesting to revisit my analysis in the coming months, and I'm sure a clear upward or downward direction will emerge at that point. By the next two quarters at the latest, I believe it will become evident whether the management's recent decisions are winning or not.
For further details see:
AMMO Shifts To Brass: Uncertainty Amid Strategic Shifts