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Why AMMO Tumbled 14.5% This Week

By Rich Duprey - Jul 18, 2021 at 10:19AM

Key Points

  • The ammo maker recently reported record earnings.
  • AMMO released a second quarter earnings update that suggests the barn-burner environment persists.
  • FBI data showing declining numbers of background checks on gun buyers is not what it seems.

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The market is focusing on the wrong industry data.

What happened

Shares of AMMO (POWW 1.18%) tumbled hard this week, falling 14.5% compared to the market indexes, which were essentially flat, on no specific news to the company.

In fact, the ammunition manufacturer issued an earnings update for the second quarter stating it expected to report quarterly sales of $51 million, a 400% increase from the year ago period.

Ammunition in factory sorting machine

Image source: Getty Images.

So what

AMMO's decline continued one that began at the start of the month following its first-quarter earnings report and the FBI's report that criminal background checks on potential gun buyers through its National Instant Criminal Background Check System (NICS) plunged 15% from the year ago.

The National Shooting Sports Foundation says background checks adjusted to remove those performed on existing concealed-carry permit holders and other anomalies in the FBI's raw data indicate they are actually down 22% year over year and the so-called "Biden bump" is not over.

AMMO's first-quarter results, however, showed revenue was higher by more than 400%, suggesting this rate of growth is not necessarily a one-off event.

Now what

AMMO wasn't alone in seeing its stock fall as gunmakers Smith & Wesson Brands and Sturm, Ruger were down month to date 22% and 10%, respectively, while fellow ammo maker Vista Outdoor was off about 14% for the period.

The sell-off may be premature. While the year-over-year decline in background checks seems alarming, in fact gunmakers and ammo makers are still reporting outsized demand for their products. Last year was a massive year for sales, with millions of people choosing to buy their first-ever firearm, so the comparables the companies are going up against are difficult to surmount, but demand remains elevated and there is still a big shortage of ammunition that will persist for some time to come.

That indicates AMMO will be able to continue growing at a heightened rate and the decline in its stock may not be warranted.

Rich Duprey owns shares of Smith & Wesson Brands, Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AMMO, Inc. Stock Quote
AMMO, Inc.
POWW
$5.98 (1.18%) $0.07
Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
SWBI
$14.90 (1.08%) $0.16
Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
RGR
$58.97 (0.96%) $0.56
Vista Outdoor Inc. Stock Quote
Vista Outdoor Inc.
VSTO
$31.15 (2.06%) $0.63

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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