In this segment from Industry Focus: Consumer Goods, the cast continues with its theme week as financial analyst Gaby Lapera sits in on the show to hear stock pitches from analysts in each sector. After hearing about the dominant position that Anheuser-Busch InBev holds in the beer industry, Motley Fool analyst Vincent Shen is ready to counter-punch with the interesting story at American Outdoor Brands (NASDAQ:SWBI). Learn about its strong reputation in the world of firearms and how recent acquisitions position the company for future growth.
A full transcript follows the video.
This podcast was recorded on Feb. 7, 2017.
Vincent Shen: In the red corner, standing in at $1.1 billion market cap, seems kind of humble now, from Springfield, Massachusetts, with 1,500 employees, American Outdoor Brands.
Gaby Lapera: Home-grown!
Shen: Home of the legendary Smith & Wesson. So, not as big, but I will show you why -- I actually love both companies, frankly, so this isn't that hard for me. Smith & Wesson's name dates back to 1852. Today, it remains an undisputed leader in the firearms industry. For example, with revolvers, one out of every two revolvers owned in this country is from Smith & Wesson. So, they have their own dominant kind of market share. Half of the general population over 18 years of age knows the brand, while nine in ten handgun buyers are familiar with Smith & Wesson.
American Outdoor Brands, which they recently changed their name to, as of the beginning of this year, the company operates in two segments. They have their firearms and their outdoor products and accessories. Those further break down into their own divisions. I'll get into that a little bit more later. But, what you should know is that for the most recent reported quarter, their total sales were about $234 million. But that's up 63% year over year. So, they've seen very strong growth. Their gross margins are similarly improving; they came in at 41.8% with 2.6% expansion over the prior-year quarter. Bottom-line adjusted earnings -- and that's adjusted for some cost because they've been going through a lot of different acquisitions -- was at about $0.68 per share compared to $0.25 per share last year. Overall, with those two segments, between firearms and their accessories, the firearm segment is about $195 billion of those sales, and that was up 60% year over year. So, this is about 83% of their top line, the core of the business.
Being in the industry for so long, the company has a very strong brand. They have also developed a ton of expertise in metalworking, plastics casting, and other engineering and manufacturing specialties. What they're really doing is, they're kind of leveraging this expertise for their core firearms business, but also for these other accessories and outdoors businesses they're expanding to. I'll describe those a little bit more later.
But they are also outsourcing some of these capabilities to, essentially, B2B services, to other business partners. They have plans for this part of the business, I see this is one of the growth catalysts, to hit $100 million in the next five years. This, essentially, exposes them beyond the firearms industry, because they can help companies in aerospace, automotive, oil and gas, and medical industries, too.
And then, on the outdoor products and accessories side, that includes three different divisions. You have their core accessories, this includes stuff like what you need to clean your gun, to repair it, gunsmithing, things like that, if you're not as familiar with the space. They also have electro-optics, which includes things like laser sights and scopes.
Then, outdoor recreation, which is the newest division that was established with news that came out just toward the beginning of this year. This is really targeting things like camping, hiking, fishing, paddling sports, things along those lines. So, this is a smaller portion of the business, with just $39 million in sales, about 17% of the top line. But the high gross margins, usually approaching 50%. So, that should help the company, overall.
Without getting into too much detail, just know that, just like with Smith & Wesson, some of the brands that operate within this umbrella, like Crimson Trace and Battenfeld Technologies, Taylor, a bunch of different cutlery brands and things along those lines, these are very well-known names among enthusiasts in this market. Similarly very well-respected, like the legendary Smith & Wesson name.
So, big picture, the way I like to look at it is, you take all these diverse businesses, and then you roll together the back office administrative functions, which is what the company has been doing. So, you roll together things like accounting, human resources, legal departments into more of a centralized operation. You let the divisions focus on their innovation and their growth, and you let American Outdoor Brands lever this kind of consolidation as they seek acquisition targets. Long term, they have a gross margin target of about 37% to 41%. This was just 31% in 2012, so it has clearly improved over time. They are targeting fiscal year 2017 revenue of over $900 million, with just $723 million in 2016. Some of that growth, both organic and inorganic with those acquisitions.
The thing is, what I find really interesting is, international sales for them are still really a small part of the business, just about 3% or so. They have a very flexible manufacturing model. Basically, in the firearms industry with various politics, it can be very cyclical. And ultimately, what they have tried to do is really make their model as flexible as possible so they can adjust to the demand in the market. But also, with this increasing portfolio of different products, they can basically optimize the product mix as well, for their very well-established manufacturing facilities. This means more efficiency, more cost savings. For industry dynamics overall -- this is what I'll end on, because I'm probably running short on time -- the market for non-military firearms is only about $4 billion, and the company's market share is somewhere around 13% or 15% in this space. So, while it's a leading name, it still has plenty of room to run, and the company has very happily been taking market share for several years now. ATF estimates that the firearm industry has enjoyed a CAGR (compound annual growth rate) of about 10% from 2009 to 2014.
But the real thing here is, the shooting and hunting market is much bigger, $15 billion. You expand that to the outdoor recreation market, which they are now getting into, which is $30 to $35 billion. So, what they have really done here is taken that core, respected Smith & Wesson name, the expertise that they developed in that space, and they basically opened it up to a much bigger addressable market. So, what I see is a really long runway for growth.