Better Buy: American Outdoor Brands Corp. vs. Philip Morris

Is the gun specialist or the global tobacco behemoth the smarter pick right now?

Dan Caplinger
Dan Caplinger
Jun 28, 2017 at 9:00AM
Consumer Goods

Sin stocks have been lucrative investments, and American Outdoor Brands (NASDAQ:AOBC) and Philip Morris International (NYSE:PM) have both been able to give their shareholders good results in their portfolios. Yet for both firearms and tobacco, industry opponents are ever present and pose a constant threat.

Investors want to know which of these two stocks offers the better potential trade-off of risk and reward. With that in mind, here's a simple comparison of American Outdoor Brands and Philip Morris using a number of key metrics. It should help you make a more informed decision based on what's important to you.

Valuation and stock performance

American Outdoor Brands and Philip Morris have moved in opposite directions over the past year. Since June 2016, Philip Morris is up 23%, but American Outdoor Brands weighs in with a 9% loss over the same period.

As you might expect, the disparity in the performance between the two stocks has led to a fairly extensive valuation disparity. When you look at trailing earnings over the past 12 months, the difference looks especially large. Philip Morris trades at more than 26 times its trailing earnings, while American Outdoor has a trailing multiple of less than 10. Yet earnings expectations for the immediate future narrow that gap extensively. Expectations for falling earnings at American Outdoor Brands give the stock a forward multiple of 14. Philip Morris is still higher, but its forward multiple of 21 reflects expectations for modest growth. American Outdoor Brands stock has struggled, and that makes it look more attractive for valuation purposes.

Smith & Wesson gun.

Image source: American Outdoor Brands.


The choice between American Outdoor Brands and Philip Morris couldn't be simpler for those who rely on dividend income from their stocks. American Outdoor Brands currently pays no dividend, and it doesn't expect to start paying one anytime soon. For the most part, when American Outdoor has wanted to return capital to shareholders, it has used stock buybacks rather than dividends. In addition to having some tax advantage of shareholders, American Outdoor executives believe that the drop in outstanding numbers of shares can help bolster its per-share earnings figures and lead to higher share prices.

By contrast, Philip Morris has a commanding dividend yield of 3.5%. The company has made annual dividend increases each and every year since becoming an independent publicly traded stock. One hesitation comes from the fact that dividend growth at Philip Morris has slowed considerably in recent years. But investors hope that if some recent profit pressures start to diminish, then it will free up more free cash flow to reward Philip Morris shareholders with faster dividend growth in the future.

Regardless, if you need current income now, there's only one choice. Philip Morris is the clear winner for income investors.

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Growth and risk factors

All companies face risks, and the challenges that American Outdoor Brands and Philip Morris have both similarities and differences. American Outdoor Brands suffered when an unexpected Republican election victory in November 2016 led to fears that sales of firearms would dry up without the immediate threat of gun control legislation. However, longer-term investors note that American Outdoor and other gun companies had already said that the pace of past sales was unsustainable. The amount of decline in gun sales thus far hasn't been as extensive as many had feared, and that has helped lift American Outdoor Brands shares from their beginning-of-year slump. In addition, American Outdoor hopes that expansion beyond gun sales to capture customers for gun accessories and unrelated outdoor products could help lift future growth figures as well.

For Philip Morris, the big gamble has to do with the tobacco giant's push into alternative products. The company has come out and said outright that it expects reduced-risk products like its iQOS heated-tobacco system to replace traditional cigarettes fully at some point in the future. Studies from Philip Morris and others have shown that heated-tobacco products are less harmful than cigarettes, and although contrary studies have come to different results, Philip Morris still believes that innovation is the future for the company. So far, customers seem to agree, with iQOS commanding huge market share in Japan relatively quickly. Philip Morris hopes that approval from the U.S. Food and Drug Administration as a modified risk tobacco product could lend iQOS credibility that will spur other regulators across the globe to allow the sale of the product in their respective markets as well. Still, that's far from a foregone conclusion, and Philip Morris will have to work hard to overcome the secular decline in smoking.

Both American Outdoor Brands and Philip Morris have pluses and minuses, and which you prefer depends mostly on what your priorities are for investing. If you want dividends, then Philip Morris is your only option, while value investors will prefer the more attractive price tag for American Outdoor shares. From a growth perspective, both stocks have opportunities and potential pitfalls. Investors should pick based on whether dividends are important to them.