Is American Outdoors Brand Corp a Buy?

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The last time shares of American Outdoor Brands (NASDAQ: AOBC) were this low was in 2015, just before it began a dramatic run higher that saw it more than triple in value. It's true the market for firearms was completely different back then and the same catalysts for growth are not necessarily present today, yet there is still good reason to think the Smith & Wesson brand owner can rebound sharply and regain most of that lost ground.

Can't ignore the slump

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The firearms industry is in the grips of a fairly protracted slump. Whether based on raw FBI data for criminal background checks of potential gun buyers or the adjusted data offered by the National Shooting Sports Foundation, consumer gun demand has fallen to multiyear lows.

Adjusted January data, for example, fell to less than 1 million checks, down 8% from 2017 and the lowest adjusted numbers for January in the last six years. February's were somewhat better at 1.27 million, but still down 2% from last year's already depressed figures.

Firearms sales at American Outdoor Brands fell 40% last quarter and are down 46% over the first nine months of its fiscal year. They were down 21% for 2017 for rival Sturm, Ruger (NYSE: RGR), and the declining gun market finally sent iconic rifle manufacturer Remington into bankruptcy. Few, if any, gunmakers see the slump reversing course anytime soon.

Obviously, there are several prominent reasons for the drop. The buildup to the 2016 elections caused firearms sales that year to surpass all records, so what we're seeing now is something of a return to the mean. There is also the likelihood that major anti-gun legislation won't get passed by Congress.

Backlash against guns

Still, following the tragic school shooting in Florida, sentiment against gun manufacturers is running high, with even a former Supreme Court justice penning an op-ed in The New York Times calling for the repeal of the Second Amendment. That is also unlikely to happen, but there could be increased pressure on gun manufacturers and their retailers from financial institutions to limit gun sales, such as the list of demands Citigroup put out for its customers that sell firearms to the public. In short, it said either comply or find someone else to do business with. Others including Bank of America are reportedly mulling similar options.

Dick's Sporting Goods once again said it would not sell certain kinds of rifles and Walmart, among other big box retailers, said it would raise the age for purchasing a weapon.

It is that kind of negative environment that has sent the stock of American Outdoor Brands reeling. It trades for 17 times earnings and 15 times next year's expectations. But it trades for just 0.9 times sales -- well below the 1.25 price-to-sales ratio it sported just one year ago. Further, the gunsmith's enterprise value of about $758 million is only slightly higher than its trailing-12-month sales of $664 million.

Of course a stock can always go lower -- all the way down to zero -- but there's no indication American Outdoor Brands is anywhere near such dangerous conditions, but rather is currently suffering from the malaise in the industry and the general sentiment around firearms.

Still a reason for optimism

While guns do make up the vast majority of its sales, the company has made a concerted effort to diversify its revenue stream by branching out into the rugged outdoors market. On one level it supports and is even dependent upon the firearms industry -- its electro-optics division, for example, makes laser sights for firearms -- but there is a whole separate component devoted to the much larger outdoors market. And American Outdoors is seeing sales grow, as its outdoor products and accessories segment witnessed double-digit revenue growth last quarter. It's still small overall, but is one area where there is potential for long-term gains.

The firearms market will also turn, too. Inventories at distributors and retailers have been taken down as manufacturers engaged in discounting to move product and maintain market share. Once the shakeout is through, it's likely we will see movement higher again.

There is also always a political component surrounding gun sales, and with legislative elections this fall, any significant move away from a pro-gun rights Congress could be seen as an opportunity for new gun control measures to be introduced. President Trump has gone one record as supporting some of the measures, which would undoubtedly spur gun sales again if such proposals gained traction.

"Buy low, sell high" is a favorite mantra of investors, but is often difficult to do in real life because the situation or environment the low-priced stock finds itself in is so gloomy. It's hard to go against the herd, but American Outdoor Brands is a financially secure company that can weather the storm it's currently facing. Considering it's exceedingly low share price, this is an opportune point at which to buy.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.