Weapons -- and their use in everything from police stops to school shootings -- are a hot topic. Today, we'll be looking at two companies deeply entrenched in this topic: American Outdoor Brands (NASDAQ:AOBC), formerly known as Smith & Wesson, and Axon Enterprises (NASDAQ:AAXN), better known by TASER International, its name until last year.
Will these companies be hurt or helped by this scrutiny? And between the two stocks, which is a better buy at today's prices?
To get a better idea of what we're getting if we buy shares, let's examine both companies through three different lenses.
Sustainable competitive advantage
A company's sustainable competitive advantage -- or moat -- is basically what separates it from the competition and keeps customers coming back again and again over the years.
Up until three years ago, I probably would have called this a draw. American Outdoor Brands was Smith & Wesson, and relied almost exclusively on its brand as a moat. But then the company branched out by trying to build an outdoor ecosystem with the acquisition of knife-maker Taylor Brands and survivalist camping company Ultimate Survival Technologies, among others.
But the company's weapons business is still the most important: Last fiscal year, firearms still accounted for 85% of all sales. And on that front, the company hasn't been performing terribly well. While the ancillary businesses are doing well, sales of guns are down 46% through the first three quarters of this fiscal year.
But even if gun sales were doing well, investors shouldn't get too excited about a company relying upon brand strength to provide decades of compounding, wealth-building growth.
Until recently, Axon also relied primarily on brand strength for the sale of its TASER weapons. But that's starting to change. While the weapons segment still provides important revenue, it is the police-and-body-camera business that's building a superwide moat around itself. While there's nothing special about the cameras per se, the company's Evidence.com platform for storing, analyzing, and searching said video footage has very high switching costs.
Once a police department is signed on to the system, the costs of migrating all of that data and retraining entire police forces, along with the potential for losing critical legal data, become onerously high. And as you can see, the number of licenses for access to Axon.com has been growing rapidly.
That's why I'm giving the nod here to Axon.
Winner = Axon
Next I want to know how a company would fare if an unexpected economic crisis hit right now, either company-specific or macro in nature. Basically, the company could either crumble, stay the same, or actually get stronger as a result. You can read more about that here.
Keeping in mind that Axon is valued at over five times the size of American Outdoor, here's how they stack up.
|Company||Cash||Debt||Free Cash Flow|
|Axon||$131 million||$0||$35 million|
|American Outdoor||$38 million||$232 million||($10 million)|
Here again we have a very clear winner: Axon. The company has already been able to leverage its balance sheet strength to give it an enviable position in the body camera market, actually giving them away for free as a way to get departments in the Evidence.com ecosystem to stay.
With a modest cash balance, absolutely zero long-term debt, and positive free cash flow, Axon is on very stable footing. While American Outdoor's debt is far from crushing, the net negative cash position and lack of free cash flow mean the company is vulnerable to volatility in a way that Axon isn't.
Winner = Axon
Finally we have valuation. It isn't easy or straight-forward to figure out how expensive a stock is. That being said, here are four data points we can consult to get a better idea.
On just about every metric, American Outdoor is the cheaper option -- though its lack of positive free cash flow means a price-to-free-cash-flow ratio is out of the question.
Meanwhile, Axon is aggressively reinvesting in itself and giving cameras away for free. Given that the stock has tripled in just seven months, it is definitely "expensive" by traditional metrics.
Winner = American Outdoor Brands
And my winner is...
So there you have it: while American Outdoor might be a cheaper stock by traditional metrics, Axon's superior moat and financial fortitude make it the better buy at today's prices.
And lest you think this is an empty analysis, my money is firmly where my mouth is: Axon is my family's fourth-largest holding, accounting for 7% of our real-life portfolio. If you have a stomach for the type of wild swings that can come with an "expensive" small-cap stock, I definitely think it's worthy of investigation for your portfolio as well.