American Outdoor Brands (SWBI 0.77%) shares plunged earlier this month after the company reported fiscal 2018 first-quarter results that showed a 37% decline in sales and a GAAP net loss of $0.04 per share. Even after adjusting for one-time events, the $0.02 per-share profit was way below what analysts had forecast.
The firearms market has weakened considerably since November, and it surprised even the company, which said shipments came in below expectations.
Image source: Smith & Wesson.
Off the mark
The poor showing dragged rival Sturm, Ruger down, too. Having lost half its market value since the U.S. presidential election, American Outdoor Brands now trades at only 10 times forward earnings estimates (while analysts forecast annual bottom line growth over the next five years of 15%). The market is discounting the company so steeply that it seems to imply American Outdoor is a broken business. Yet the gunsmith remains a financially healthy enterprise with a wealth of opportunity in front of it -- so much so that the latest trade off means it's simply too cheap to pass up.
The company got very promotional during the quarter in a bid to maintain market share. It said gross margins got whacked, dropping from 42.3% last year to 31.5%, but as a result of the discounting, it won "significant market share in the first quarter as a large number of consumers purchased the Shield pistols that we have previously shipped into the channel."
The company further pointed out that due to the discounting, the Shield pistols grew their share of the total handgun market by 5 points.
But American Outdoor can't escape the slow market, as it was going up against substantial demand a year ago, "which we believe was driven by concerns for personal safety and the potential for increased firearm legislation."
Image source: Getty Images.
Not returning fire
A year ago, American Outdoor enjoyed firearms sales growth of almost 50% as Hillary Clinton become the presidential front-runner as a supporter of more stringent gun control. To put that year-ago period in perspective, American Outdoor Brands reported $192.4 million in firearms revenue -- this quarter, it had less than $98.4 million, a decline of nearly $100 million.
So on the one hand, it's understandable why the gunsmith's stock has taken a beating, but on the other, it's way oversold.
Just look at numbers from the FBI. While criminal background checks of potential gun buyers are down 9% year over year, 2016 was a remarkable year by all accounts. Background checks were up almost 30% over 2015 at this same juncture. If you compare 2017 and 2015, you find they're running 18% higher this year.
Data source: National Shooting Sports Foundation. Chart by author.
Even better, if you look at the adjusted numbers from the National Shooting Sports Foundation, which eliminates checks on existing concealed carry permit holders from the FBI data, and do a two-year running total to smooth out the differences, you find 2016 to 2017 is about 2.5% higher than 2015 to 2016.
What all this means is the gun industry is far from dead, and demand for firearms is very much still on the same long-term trajectory -- going higher. Pricing American Outdoor Brands as if it's about to go out of business, without even taking into account the significant organic growth it has enjoyed in its rugged outdoors segment or the suppressor manufacturer it just acquired -- a potentially large new opportunity if these accessories are deregulated -- makes the gunmaker's valuation a real bargain.
