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American Outdoor Brands Corporation (NASDAQ:AOBC)

American Outdoor Brands Corporation (formerly known as Smith & Wesson Holding Corporation) is one of the world’s leading producers of quality handguns, law enforcement products and firearm safety and security products. Law enforcement personnel, military personnel, target shooters, hunters, collectors and firearms enthusiasts throughout the world have used the company’s products with confidence for 150 years. American Outdoor Brands Corporation also manufactures and markets Smith & Wesson branded handcuffs and other products utilizing its metal working expertise and providing products and services to many external customers. Approximately 90.1% of their net firearm sales in fiscal 2016 remained in the sporting goods distribution channel

Since Trump election, the stock price of AOBC had tumbled by about 20% to 20.60. Because Donald Trump won the presidential election on Nov. 8, consumers are less apprehensive that firearms will become harder to obtain due to the Republican Party’s continued support of the Second Amendment. Had Hillary Clinton been victorious, consumers would likely have shown an increased interest in purchasing firearms due to her support of stricter gun control laws

Comparison to Competitors

  Current Metrics Competitor Metrics, Sturm Ruger (RGR) Competitor Metrics, Vista Outdoor(VSTO)
PE (TTM) 8.09 11.96 11.6
Net Margin: 15.15% 12.79% 6.2%
ROE: 44.96% 33.89% 9.36%
ROA: 22.47% 24.89% 4.86%
Current Ratio: 2.27 2.71 2.12
Total Debt/Equity: 0.5 0 0.55
P/CF(TTM) : 7.9 9.87 7.81
Total Revenue 722.9M 551.1M 2.3B

 

Comparing the three companies, AOBC metrics proved to be better and I believed that the TRUMP effect is temporal. With the proposed tax cuts in place, we should see a rise in household disposable income which will have a positive effect on gun sales. According to data from a 2014 General Social Survey report, gun owners tend to be a pretty affluent bunch. GSS data show that gun ownership rises sharply with income, with householders earning less than $25,000 only 18% likely to own a gun, while 44% of households earning $90,000 or more own a gun.

Why the future is brighter for American Outdoor Brands

Rather than relying solely on guns, the company has sought to cater to hunters and hardcore outdoors enthusiasts more broadly. As CEO James Debney put it last November, “We have successfully grown from a single operating division to four operating divisions that serve a large addressable market and represent more than 18 respected consumer brands.” The CEO believes that the new name “better reflects our family of brands, our broad range of product offerings, and our plan to continue building upon our portfolio of strong American brands.” Shareholders agreed, approving the change. (Source Motley Fool: http://www.fool.com/investing/2017/01/10/smith-wesson-stock-history-a-new-chapter-begins.aspx)

Therefore, even if it’s assumed that firearms sales decline gradually, Smith & Wesson is likely to offset that decline through focus on a broad range of businesses. Just to put things into perspective from a progress point of view, Smith & Wesson recently acquired the net assets of Ultimate Survival Technologies for a consideration of $32 million. Ultimate Survival Technologies is a provider of high-quality survival and camping products, and the company has witnessed revenue CAGR of 49% for the period of 2012 to 2015. (Source: http://www.gurufocus.com/news/464895/reasons-to-be-bullish-on-smith–wesson)

 

Economic moat

AOBC has a narrow moat as it operates in a specialty market but given their attractive margins over their peers, I believe that it has some competitive pricing.

Risks

Gun industry is heavily regulated and affected by consumer sentiment and economic conditions. There are also gun groups that opposed to the ownership of guns. In addition, significant expenses related to proposed new products that prove to be unsuccessful for any reason will adversely affect AOBC operating results.

Following the election results Smith & Wesson eliminated an army contract of $500 million so the market is anticipating a decline in sales and profits, but that’s already priced in at this point.

The long-term risk is demographic shifts away from guns since America is still the largest buyer of them at an individual level.

Fair Value Estimate: 24.92 (DCF)

Current CEO

Mr. P. James Debney has been the Chief Executive Officer and President of Smith & Wesson Holding Corporation since September 27, 2011. Mr. Debney served as a Vice President at Smith & Wesson Holding Corporation from April 2010 to September 27, 2011 and served as its President of Firearms Division from November 2009 to September 27, 2011. He served as President of Presto Products Company, a $500 million business unit of Alcoa Consumer Products from December 2006 to February 2009. He served as Managing Director of Baco Consumer Products, a business unit of Alcoa Consumer Products from January 2006 to December 2006; Manufacturing and Supply Chain Director from August 2003 to December 2005 and Manufacturing Director from April 1998 to July 2003. He joined Baco Consumer Products in 1989 and held various management positions in operations, production, conversion and materials. He has been a Director at Smith & Wesson Holding Corporation since September 27, 2011.

Insider Trade

Recently CEO bought more than $600,000 worth of stocks in 3 separate filings from 9-11 Jan 17. This is especially bullish. There were 2 other occasions where he bought shares (Oct 14, Dec 12). In both occasions, the share price increased by more than 20% within a year.

 

Disclaimer:

I own a $15 call expiring Jan 19 and sold a $25 put position expiring mar 17