AMMO, Inc. (NASDAQ:POWW) is a $613 million market cap Arizona-based manufacturer and seller of ammunition. The company has a long track record, having been founded in 1990. The stock has had a massive run over the past year, delivering strong shareholder returns.
Even after this recent strength, the company remains undervalued as fundamental prospects are improving significantly. I expect the company to be profitable in coming quarters, which should allow management to continue to build on recent momentum in favor of continued shareholder returns.
POWW trades at a market cap of just over $600 million, with sales of $43 million in the last year. While expensive on a price to sales basis at nearly 15x, the company’s sales are growing aggressively, which should justify the elevated sales multiple. POWW has taken its quarterly revenue from below $1 million to nearly $20 million over the past few years.
Even as the absolute level of sales has grown, the quality of this revenue is also favorable to the company, with receivables coming in on an increasingly timely basis.
Detractors to the bullish thesis here may claim that the company’s recent history of triple-digit percentage growth in revenue is unsustainable. While this may be the case, looking down the income statement reveals that POWW should generate good returns for shareholders even if growth decelerates.
Gross margin has expanded considerably over the past quarters, and the company now runs a 20% gross margin:
Unlike many other perceived high-growth companies, the improvement in fundamentals at POWW is significant and may justify the significantly higher share price today compared to recent history. On an EBIT margin basis, the company’s losses are minimizing and trending toward profitability:
POWW recently acquired GunBroker.com, which came with a large sales backlog. Earlier this month, the company guided nearly 200% higher for Q1 revenue relative to last year’s similar period, at the $27 million level.
From a differentiation standpoint, the company has an interesting university partnership on the luminescent ammunition front, to allow visual line of fire sighting for shooting enthusiasts. This, along with the company’s differentiation in technology on the military hardware front, should allow management to retain the company’s superior market position and distribution leadership.
Despite historical unprofitability, management is capitalizing on recent surges in demand for company products. The company is attractive at its current market valuation, and investors should consider it for their portfolios.
While POWW has enough liquidity to weather the next couple of quarters, shareholders should keep an eye on dilution as the company may need to raise capital depending on when its free cash flow inflection occurs. Especially in light of the recent acquisitive behavior, potential long investors should also closely monitor future capital allocation decisions on the part of management to ensure the “empire building” pursuit does not result in overpayment for potentially low-quality assets. Given management’s superior allocation decisions so far, though, this risk should be mitigated in large part.
Even after its recent run-up, POWW remains materially undervalued and should be a prime play to capitalize on continued interest and aggregate demand increases for ammunition in coming years. Investors should consider an allocation in their equity portfolios. Good luck to all.