It might look like doom and gloom for American Outdoor Brands (SWBI 1.66%) after it reported weaker guidance than expected, but to paraphrase Mark Twain, the rumors of the gunslinger's demise have been greatly exaggerated.
The owner of Smith & Wesson continually surprises Wall Street, and it's likely to do so again in the coming quarters. In addition to the core firearms business, there are a number of good reasons why the best days are still ahead for this company.
Image source: American Outdoor Brands.
Firearms, foremost
The elephant in the room remains the firearms market. That business drives the stock, but the current weakness in demand is no reason to bail.
The factors that have produced the heavily promotional environment for the industry are well-known at this point. From last November's elections to the numerous bankruptcies in the sporting goods industry, firearms dealers have encountered a buildup of inventory that was met with a fire sale on guns, driving down prices. When major outdoor chain Gander Mountain decided to essentially liquidate its inventory to minimize the contribution of firearms to revenue, pricing was naturally affected.
American Outdoor Brands experienced a similar phenomenon several years ago after the high-profile shootings and corresponding fears of increased regulation caused firearm sales to spike. There are natural ebbs and flows in this business.
With leading market share, popular new products, and a seasoned management team, American Outdoor Brands will weather the tempest just fine.
Rugged outdoors individualism
Running parallel to firearms is the rugged outdoors space the company is staking for itself. It continues to make acquisitions that support not only the primary gun business but help diversify it away from the volatility of that space.
Image source: Gemini Technologies.
Most recently, American Outdoor purchased silencer manufacturer Gemini Technologies as well as Fish Tales, a knife maker and manufacturer of fishing and hunting tools. The latter adds to last year's acquisition of Taylor Brands, another knife brand, but the rest of the business introduces the company to the fishing market.
On the other hand, the GemTech purchase provides access to a small but growing niche of the firearms industry. Right now, the silencer industry is in something of a holding period as companies and consumers await potential legislation that, if successful, could turn these firearm accessories into a booming business.
These are all complementary acquisitions, and as the outdoors market is orders of magnitude larger than firearms alone, it gives American Outdoor Brands a platform from which to grow.
Small-caliber valuation
Currently, American Outdoor Brands trades at 8 times trailing earnings and around 13 times forward estimates, according to data from S&P Global Market Intelligence. With analysts still expecting earnings to grow 15% annually for the next five years, the company trades at only a fraction of its growth rate.
Additionally, it continues to generate significant free cash flow, and by that related measure, the stock is a bargain:
Data by YCharts.
American Outdoor Brands is using its cash on hand to make the recent acquisitions. While none are large enough to significantly transform the company, it has dry powder to continue pursuing opportunities complementary to its firearms or outdoor segments.
All of these points indicate American Outdoor Brands is forging ahead from a position of strength, and investors should feel confident its best days are yet to come.
