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AMMO Inc.: Discounted Stock Shooting for the Stars
Stock Analysis & Ideas

AMMO Inc.: Discounted Stock Shooting for the Stars

AMMO Inc. (POWW) is a manufacturer of high-quality ammunition for pistols and large rifles. The company has the capacity to deliver more than 750 million rounds per year, and expects surpass 1 billion rounds in production on an annual basis in the near-term.

Proud of its U.S.-made parts and production capabilities, the company now has total power over the manufacturing process. Hence, AMMO enjoys several competitive advantages when it comes to the rounds that leave its state-of-the-art facility.

AMMO acquired online auction house company gunbroker.com last year. Not only did the deal grant POWW access to a higher-margin business, but also vertically expanded its operations, unlocking multiple synergies between its core bullet production and its new marketplace.

With the company having a clear runway for growth ahead and the stock trading at quite an attractive valuation, I am bullish on AMMO.

The Growth Story

AMMO’s revenues have been proliferating, with the company’s quarterly revenue growth sailing in the triple-digits. In its latest quarterly report, the company recorded net revenue growth of 289% to $64.7 million.

AMMO is tapping into the premium firearm ammunition market and is hence focused on manufacturing high-quality ammunition. Therefore, the company experiences high demand both from commercial clients and military/law enforcement. The company’s growth momentum hardly displays any signs of slowing down, as management guided for FY2022 revenues of at least $250 million.

Basing an assumption off the last three quarters of performance, it can be surmised that the fourth quarter’s revenues will be around $80M. This implies Q4-2022 revenue growth of at least 254%. In fact, the company highlighted that 100% of its production for 2022 has been sold, and that strong demand does not seem to be waning any time soon.

Further, with the acquisition of gunbroker.com, AMMO’s margins have improved immensely. The last twelve-month gross and net margins currently stand at 40.3% and 17.7% compared to 10.7% and -29.3% a year ago.

The Valuation

AMMO is well-positioned to keep enriching its margins going forward, supported by two catalysts.Firstly, the company is developing a $24M+ state-of-the-art ammunition manufacturing plant which is expected to come online this summer. It will further scale production, allowing the company to achieve economies of scale.

Secondly, gunbroker.com’s higher-margin sales developing into a higher percentage of total sales should further enhance AMMO’s overall margins mix.

If we are to assume a conservative FY2023 revenue estimate of $320M (which is Q4’s run-rate based on known revenues of at least $80M) and net margins of at least 20%, the company is likely to earn close to $64M next year. At a market cap of $562 million, the stock is essentially trading 8.7 times next year’s projected net income, which I find rather attractive when combined with the business’s overall growth prospects.

We can also confirm shares are trading on the cheap as management announced a $30 million stock repurchase program despite the company being in its early stages of growth. This amount represents a buyback yield north of 5% at AMMO’s current price levels, which is a magnificent capital return, again, considering that AMMO is still a hyper-growth company.

Wall Street’s Take

Turning to Wall Street, AMMO has a Moderate Buy consensus based on one Buy rating assigned in the past three months. At $9.00, the average AMMO price target implies 79.28% upside potential.

Conclusion

In my view, AMMO combines an exciting growth story, improving profitability prospects, and a reasonably (if not cheaply) valued stock. While some investors could be hesitant, and rightfully so, to allocate capital to a bullet manufacturer for ethical reasons, AMMO likely presents a very fruitful investment case.

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