Better Buy: Axon Enterprise Inc vs. American Outdoor Brands Corp

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On the face of it, these two companies share a ton of similarities. Formerly known as TASER International and Smith & Wesson, respectively, Axon (NASDAQ: AAXN) and American Outdoor Brands (NASDAQ: AOBC) are both recognized for their weapons above all else.

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But both companies are also undergoing massive changes to their traditional business models. Axon now focuses on body cameras and a platform for storing and organizing all of that data; and American Outdoor is offering up more outdoorsy stuff like camping gear and knives.

So which one of these evolving companies is a better buy at today's prices? That's impossible to say with complete accuracy, but to give us a better idea of what we're buying if we purchase shares, here are three key metrics and how they compare.

Sustainable competitive advantage

If you are a long-term, buy-to-hold investor, let me let you in on a little secret: there's nothing more important to understand than a company's sustainable competitive advantage -- sometimes referred to as a moat. In the simplest sense, a moat is what differentiates a company from all of its competition.

For a long time, both of these companies relied upon scale and the power of their brands -- TASER and Smith & Wesson firearms -- to provide their moats. Recently, however, one of the companies has gained the upper hand.

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While American Outdoor's acquisition of companies like Ultimate Survival Technologies and Taylor Brands has the possibility to create a more powerful ecosystem and brand awareness, Axon is locking customers in with its Evidence.com platform.

Once a police department has the footage it collects from body cameras, it needs a place to store and organize data, and -- through the use of AI -- find patterns with that information. Axon provides that on a subscription basis with its Evidence.com platform.

This is the key catalyst behind an investment in Axon. Once police departments use Axon cameras and sign on to Evidence.com, they would have incredibly high switching costs, financially, from a logistics standpoint, and -- potentially -- legally. That's why the company began a program to give their cameras away for free to any department that wants them.

The company knows that with each additional body camera in use and each Evidence.com subscription booked, they've got a long-lasting, high-margin revenue stream flowing in.

Winner = Axon

Financial fortitude

Investors in Axon understand that the company is using sales to invest in the future. Meanwhile, American Outdoor investors are probably hoping that the company can start paying a dividend soon. But beyond growth and payouts, there's something to be said for keeping a reliable cash stash on hand.

That's because every company, at one point or another, is going to face difficult economic times. Those that have cash on hand actually emerge stronger by buying up their own stock on the cheap, acquiring rivals, and spending the competition into oblivion. Debt-heavy companies are in the opposite boat.

Here's how American Outdoor and Axon stack up, keeping in mind that the latter is valued at a 15% premium to the former based on market capitalization.

Company

Cash

Debt

Net Income

Free Cash Flow

American Outdoor

$62 million

$211 million

$128 million

$89 million

Axon

$107 million

$0

$17 million

($14 million)

There's no doubt that American Outdoor is pulling in more cash right now. But that's largely because Axon is giving its cameras away for free at the moment. As it is, the company's cash burn isn't bad at all -- access to Evidence.com is offered free for just one year. Axon has enough on hand to endure over five years of similar cash burns.

With no long-term debt to speak of versus American Outdoor's use of leverage, I think that Axon's balance sheet strength will allow it to emerge stronger from a prolonged bout of difficult economic times.

Winner = Axon

Valuation

And then we have the can of worms that is valuation. There's no one metric that can tell you just how expensive a stock is. Instead, I like to use a number of data points to get a more holistic picture.

Company

P/E

P/FCF

P/S

PEG Ratio

American Outdoor

7

11

1.1

0.8

Axon

69

N/A

3.7

2.9

Here American Outdoor has the clear advantage. The domination of Republicans at the ballot box last November meant that few were worried about tightening gun controls. That meant demand for guns actually went down, leading to a bargain-basement valuation for American Outdoor.

Winner = American Outdoor

My winner is...

So there you have it: while American Outdoor is demonstrably cheaper than Axon, Axon has a wider moat and more financial fortitude, making it the winner of today's competition. I personally own shares myself, and believe that if you're looking for a small cap with a growing moat, and can stomach volatility on the way, it's worth checking out for your own portfolio.

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Brian Stoffel owns shares of Axon Enterprise. David Gardner has no position in any of the stocks mentioned. Tom Gardner has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a disclosure policy.