POWW Why I'm so Bullish on Ammo Inc: A Forward Looking DD 23 April 2022

A Possible 3x Bagger in the Making (Free to All StockTips Subscribers)

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Apr 23

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It’s about time that I explain in greater detail my reasoning behind my call on Ammo Inc. (Nasdaq $4.19). Indeed the stock has pulled back quite a bit since I first called it at $6.29 (Currently trading at $4.19 means a 33% drop since). Nevertheless, there are three solid reasons I’m still holding this company … & probably will for a good bit. Firstly, as I demonstrate in my analysis below, the numbers line up for likely doubling or tripling my money in possibly less than a year to up to two years. Secondly, there are simply too many companies that will be overly sensitive to inflation & present too much risk if analysts are correct on a possible recession. I don’t think this will be as much of a problem for Ammo Inc, which I also explain later on. Third, its a great company to sell Covered Calls on or deep in the money Cash Secured Puts for some easy options income while you’re waiting for the price action to rebound (Explained in detail later).

First, to set the stage, lets look over the earnings from the past year.

February 2022: Non-GAAP EPS of 0.14, $64.69m in Revenue

November 2021: Non-GAAP EPS of 0.17, $61m in Revenue

August 2021: Non-GAAP EPS of 0.13, $44.47m in Revenue

June 2021: Non-GAAP EPS of 0.04, $24.2m in Revenue

These 4 quarters mark the first 4 quarters of profitability for Ammo Inc. A total annual EPS of $0.48 per share over the last 12 months & $194.36m in revenue, granting a current trailing PE of 8.72 (16.00 using GAAP) & a PS of 2.47. Now you all know I like to see my Price to Earnings Ratios below 15 for such companies & my Price to Sales Ratios in the sub 1.0 range. So why would I advocate for an overpriced stock? The answer is simple. I’m pricing in future growth with the new facility (to be completed this Summer).

However before we dive into that lets average everything out & assume there wasn’t a new facility. Lets drop the June 2021 quarter above & average out the remaining three. Why? Because that June quarter is a low outlier & not likely to happen again under current circumstances. At that time they were emerging into profitability for the first time, & therefore that reporting period does not reflect future EPS & revenue very well. This brings us to an average $0.146 Non-GAAP quarterly EPS & an average quarterly revenue of $56.72m. I’m using Non-GAAP throughout this analysis because that is what the company reported during earnings. Now, due to the difficulties & expenses they went through in making acquisitions, raising money, paying for the new facility, adjusting operations, & finding their way to profitability, lets average those numbers up a bit, but not too high. We need to stay conservative here. Lets price in $0.15 in Non-GAAP avg quarterly EPS & $60m in avg quarterly Revenue (I don’t believe they will ever be sub $60m when they complete the new facility anyway). Assuming this would be their average earnings moving forward, this gives them a forward PE of 6.98 & a PS of roughly 2.0 AT CURRENT SHARE PRICE. Their book value in this scenario would also jump from $3.23 to $3.83 with this forward outlook. This is where I expect them to be at moving forward without the new facility, & no doubt they can do better. Indeed they could likely average a quarterly EPS of $0.16-0.18 if they weren’t inhibited with expanding into the new facility or spending money for additional advertising, among other items.

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Now lets conservatively price in the new facility.

In the quarter ending in April of 2021, gunbroker.com gross profit margin was 42.7%. In the quarter ending in September of 2021 it was 43.0%. I cannot find gunbroker’s gross profit margin for the quarter ending in December 2021 (They didn’t separate it from overall margin it seems), but they made it clear that they cut operating expenses down 18%. Why am I looking at their gunbroker marketplace right now? Because I need to isolate the gross profit margin of their ammunition segment ... which is the segment that will greatly expand with the addition of the new facility … so that I can properly estimate the increase in EPS as a result of the new facility. Remember that gunbroker.com will not be expanding sales & output as a result of the new facility, (for other reasons perhaps), but rather the new facility can triple their ammunition production. So if I am to accurately estimate future possibilities, I need to assume slower growth in gunbroker EPS than ammunition EPS.

Gunbroker marketplace revenue was $12,272,066 in June, $16,777,216 in September, & $17,596,769 in December. Of course we can’t count June because they just acquired gunbroker & that quarter is not representative of a full three months of gunbroker revenue. So lets assume $17,186,992 in revenue with a 42.85% gross profit margin. This gives us roughly $7,364,626 in gunbroker gross profit. So the amount of quarterly EPS attributable to gunbroker should be around $0.05 per share after taxes (effective tax rate is currently 13%), or somewhere thereabouts. So we can conclude that gunbroker revenue makes up roughly 1/3rd of overall EPS. Now there are a number of ways we could have calculated that to make it more, or make it less, depending on how fancy we want to go into the numbers. However on the whole, roughly 1/3rd of Ammo Inc.’s EPS is derived from gunbroker.

So now we deduct our gunbroker EPS & Revenue from overall quarterly EPS & Revenue which gives us a quarterly EPS of $0.10 & $42,813,008 in revenue from ammunition & brass sales. An somewhat accurate estimate considering their most recent earnings where they announced 44.1m in ammunition sales last quarter.

Ammo Inc. claims that the new facility will triple production. For now lets assume it merely doubles it. This would give us an EPS of $0.20 from ammo & $0.05 from gunbroker for a total average quarterly EPS & revenue of $0.25 & $102,813,008. Of course this would be misleading, because when you increase the scale of production you can usually decrease the cost of production but lets stick with this for now. This would be an annual EPS of $1.00 & $411,252,032 in revenue. Meaning a PE of 4.19 & a PS of 1.16 at current prices, … now were looking good! These numbers would put fair value at around $5.00-$10.00 per share, or rather 5-10 times forward earnings … & that’s conservative in my opinion!

Now lets assume they operate at max claimed capacity. Now we’re looking at a quarterly average EPS of $0.35, & a quarterly average revenue of $145,626,016. This puts them at an annual EPS of $1.40 & an annual revenue of $582,504,064, or, a PE of 3 & a PS of 0.825 AT THE CURRENT SHARE PRICE of $4.19 per share. This would make fair value $7.00-$14.00 per share, or 5-10 times forward earnings.

In reality we should expect something between $0.25 & $0.30 quarterly EPS & revenue between $411,252,032 & $582,504,064. But you get the point. If the market values this company fairly upon reaching max capacity with a proven boost in earnings for a bit, traders should price this company somewhere between $7.00-$12.00 per share … which is double to triple current trading value. (My estimates are wide ranging to ensure accuracy folks). Yet another way to convey the significance of this, is to realize that Ammo Inc currently has a book value per share (BVPS) of $3.22. That’s only $0.97 below current trading value. On a promising year (after the new facility) combined with solid stewardship, Ammo Inc.’s current share price could be met or be below future BVPS in additional EPS alone in 3-4 quarters … which means future growth hasn’t exactly been priced in much… at all!

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Now it’s important to understand that this does not take into account the reduction of operating costs, an increase or decrease in the profitability of gunbroker, streamlining of operations, any possible DOD contracts, training new workers, costs in transitioning to the new facility, inflationary headwinds or tailwinds, backlog/demand fluctuation, an increasing book value, increasing input costs, or even trading firms with commitments to move to more ESG type investments. And it also does not take into account their recent commitment to buy back $30,000,000 in shares, which would mean they can currently buy back up to 6.23% of the shares outstanding AT CURRENT PRICES. The share buybacks should not only increase EPS by 5-6.23% (depending on what price they buy the shares back for), but I suspect that if they don’t get the share price they’re looking for, it’s safe to say they will likely increase the buybacks further still.

Typically under a highly overvalued markets, such as the one we are coming off of, pricing in years of earnings well beyond that which would have otherwise been acceptable is common place. An attractive pullback under these circumstances later become undesirable as the markets adjust, & a major catalyst is needed to flip the script. The market has taken a turn to the negative as a result of inflation, expected rate hikes, & possible recession fears. So what was an awesome opportunity back in late September, is not so much in late January. Hence my call late last year for an entry at $6.29 isn’t going well. But I believe given the circumstances there is little to worry about. There are plenty of catalysts ahead for Ammo Inc … namely completion of the new facility this summer & the subsequent earnings thereafter.

There’s also a lot going in Ammo Inc.’s favor right now. Crime is skyrocketing, guns are in the news, political leaders are speaking out on gun violence (Good or bad it always helps the gun industry), there is a war in Europe (gun & ammo sales increased when Ukraine kicked off), there is an ammunition shortage, Biden has blocked Russian ammunition imports (5% of the US market), & we have record gun sales … especially among first time buyers. Moreover Ammo Inc. sells their patented non-flammable streak ammunition which works like a tracer without catching the impact area on fire … on indoor or outdoor ranges, & they have only just begun the journey into this selling point. Finally, should they ever have issues selling their ammunition to retailers, they own their own marketplace in gunbroker, & can therefore skip straight to the customer, which most ammunition producers cannot do. The CEO mentioned something to this effect amid last years earnings.

Ammo Inc. has a lot NOT going for it as well. In a time when big trading firms are investing more & more “consciously,” the gun industry ranks up there with cigarettes, fossil fuels, synthetic opioid’s, domestic mining, & baby seal clubbers (one of those was a joke). Oddly marijuana escapes this list, but Environmental, Social, & Governance, (ESG) investing is all the rage & a good way for firms to virtue signal to wealthy elites. This puts Ammo Inc. on the backburner for large investment firms trying to please their snooty elite clients & political patrons.

Though many folks worry for their investments amid an environment of high inflation & a possible recession ahead, I do not with respect to Ammo Inc. As we saw in the 2008 housing crisis & subsequent recession, crime went up dramatically. First time gun owners also skyrocketed as people sought to defend themselves against increasing crime shown relentlessly on the nightly news. Indeed, guns and ammo tend to do well in both bullish & bearish environments. And even though gun background checks have fallen since record highs derived from politicians threatening to shut down gun shops last year amid covid, they are still well above or even with historical pre-covid highs. But nevertheless, as Ammo Inc. would tell you, they are in the ammunition manufacturing business, not the gun manufacturing business. Although gun sales are a solid indicator, albeit a very imperfect one, of gunbroker auction revenue.

I’m also not worried because I’m making plenty of money selling the $5.00 & $7.5 strike call options. This lowers my cost basis over time & will earn me an even greater profit when this position eventually turns around. I made a video on how to do this HERE. Traders may also opt to to sell deep in the money cash secured puts when the price is low. I explain the virtues of this strategy in a video HERE. In short, if the price is high you sell calls, or if the price is low you sell puts (deep in the money if you want to be assigned for a cheap price). If assigned on the puts, no problem, you like the stock. If assigned on the calls, well… you lose your shares .. so you may need to roll them. I don’t want to be assigned on my calls so I sell the out of the money $7.5’s which is less premium, but I can rest easy knowing my shares wont get called away for anything less than an amazing profit. It’s essentially turning a stock that pays no dividend into a dividend paying stock. I reinvest the proceeds back into the company which lowers my cost basis.

I doubt the journey will be as smooth as I make it out to be. No stock ever is. Folks want their money yesterday. Traders are impatient. And the company wont exactly shoot up to the aforementioned EPS targets as soon as the facility is produced, but gradually over time. But in a market that’s lackluster at best, a possible 100-200% profit in a year or so, with option income enhancement, ain’t all that bad! This is why I do not keep it locked behind the paywall on the StockTips BUY LIST. I want to share this trade idea with everyone before the big institutions pre-emptively get their greedy paws into it, never to come back down for small retail investors. This stock is affordable for small accounts so I want to shoot one out to the little guy. Remember that the new facility will be completed this summer!

I am long Ammo Inc. & it is by far the largest position in my portfolio. Funny I include this because typically my interest in stocks such as these is to keep them secret because the lower the volatility currently the higher the positive price action later. Nevertheless, I believe that this is one of those rare stocks that one can invest in & double to triple their money over time.

If you find any mistakes I made or things I left out, please leave a comment below. I will happily change my analysis or include your observations if things look inaccurate or you can think of a better way to value this company. You can both listen & read the most recent earnings call HERE. Highly recommend you pay attention to the Q&A segment. It’s nothing short of entertaining.

Thanks for reading, God Bless, & Safe Trading!

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