American Outdoor Brands (NASDAQ: AUGUST) - American manufacturer of sports weapons and recreational equipment, which was spun off as a separate business in 2020. Recently, insiders have become interested in the company and decided to buy its shares - this is often a good indicator of future profitability..
Let's figure it out, why insiders are interested in such a business segment and what to do with it ordinary investors.
What the company makes money on
American Outdoor Brands distinguishes four segments:
- Production and sale of sporting weapons.
- Sale of accessories for weapons: sights, collimators and so on.
- Sale of hunting accessories, cutlery and edged weapons.
- Sale of tents, sleeping accessories, fishing tools and fire-making equipment.
The company does not disclose the earnings of each segment. Territorially 97% revenue comes from the American market, and according to the source of receipt of proceeds 39% accounts for online sales.
The company is highly dependent on specific sellers, and this is a serious minus. If the client terminates the contract or refuses to renew, then revenue will plummet. Such situations rarely happen., but you can't forget about this risk.. The three largest clients account for about 42% proceeds, and the largest online seller — 11%.
Financial performance of American Outdoor Brands,million dollars
| Revenue | Operating cash flow | |
|---|---|---|
| 4к2020 | 167,4 | 8,45 |
| 1к2021 | 184,6 | 10,59 |
| 2к2021 | 216,0 | 15,13 |
| 3к2021 | 255,3 | 26,88 |
| 4к2021 | 276,7 | 34,45 |
| 1к2022 | 287,0 | 30,84 |
Controversial points
There is money, yes not about your honor. The amount of all liabilities of the company is 65 million dollars, at the same time, the company has accumulated $ 56 million in accounts, excluding stocks of unsold products and other assets, which can be converted into money at any time. In this way, the company does not foresee any problems with debts.
This may push investors to buy shares of American Outdoor Brands in anticipation of the beginning of dividend payments.. But it wasn't here.. Management has a different goal – to spend free money on buying smaller companies..
In presentation and conference calls with analysts, the company's management constantly notes, that is considering options for acquisitions of other companies. They did this before the separation from Smith. & Wesson and will do after. The entire 15-year career of the current CEO of the company was somehow connected with mergers and acquisitions..
56 million dollars will not be enough for a serious purchase, therefore, the company has a credit line for an additional $ 50 million with a possible rate of 0.75-2.25% per annum and the opportunity to take another 15 million under certain conditions.. As a result, the company has the necessary resources, but there are no decent options, because the market is hype and companies are expensive.
Coronavirus does not let go. CNBC believes, what 35% American Outdoor Brands is located in China. Some factories suspend operations due to coronavirus outbreak, hence, the company's revenue may fall due to a lack of goods in warehouses.
Management is trying to save the situation, building up stocks: in monetary terms, they were increased by 24% - up to $ 92 million. But this may not be enough for full-fledged work.: the company's strategy is the constant introduction of new products to the market, and that requires a lot of additional resources..
Not to tell, what is cheap. The company is expensive in terms of financial performance. If you rely on multipliers when evaluating, then for a mid-level company it's too much.
Positive moments
Wealthy people are imbued with camping. In 2020, due to the coronavirus and restrictions on visiting public places, more people got acquainted with camping.. Seems to be, the effect is enhanced by remote work, because, by Observations of North American Camping, people began to go hiking more often on weekdays.
Number of campers, million people
| Beginners | General | |
|---|---|---|
| 2015 | 3,7 | 73,0 |
| 2016 | 3,8 | 74,9 |
| 2017 | 6,2 | 77,0 |
| 2018 | 4,8 | 79,1 |
| 2019 | 3,3 | 82,3 |
| 2020 | 18,1 | 86,1 |
There has also been a curious change in the incomes of campground buyers.. The largest share of novice campers fell on people with an income of more than 100 thousand dollars a year. It's good for the industry, because a wealthier audience can afford to spend more on American Outdoor Brands products.
I guess, what, when the coronavirus will be defeated, most of the people will score on the campsite and find themselves entertainment more interesting. But some part will still remain and make camping a part of your life.. And that means more related purchases..
Distribution of people's income, who visited the campsite for the first time
| 2019 | 2020 | |
|---|---|---|
| Less 25 000 $ | 17% | 10% |
| 25 000—49 999 $ | 22% | 14% |
| 50 000—74 999 $ | 19% | 18% |
| 75 000—99 000 $ | 13% | 17% |
| More 100 000 $ | 29% | 41% |
Stable growth is predicted. Management believes, that the company will be able to increase revenue by 8-10% annually over the next 4-5 years. The last 9 years, the American sporting weapon market grew by about 5,4% compounding annually (CAGR), and the hunting market is on 4,1%. Therefore, management's confidence is partly justified..
To grow faster than the industry, American Outdoor Brands will have to move faster than competitors. To do this, management plans to bring more new products to the market.. There is also a tendency to switch to direct sales.: the company develops its own brand websites, which will allow you to keep more money, than when selling through suppliers. At the same time, no one canceled the growth due to the acquisition of other companies - just accumulated extra money..
Insiders buy shares. Insiders are top managers of the company, board members or major shareholders, who are required to report their stock transactions to the Securities and Exchange Commission.
Private investor Robbe Delaet conducted research on insider trading: took stock, which had insider purchases, and took into account the value of the multiplier of free cash flow yield. 20% shares with the highest free cash flow return showed an increase in the price of 9,09% per annum more than index S&P 500. It is most effective to hold shares after 200-250 days from the date of insider purchase.
Recently, two insiders bought shares of American Outdoor Brands at 24.81 and 25 $ per share. On 29 October 2021 shares are cheaper. Average value of the multiplier of free cash flow yield 20% shares was 7,2%. At the time of insider purchases, the American Outdoor Brands multiplier was about 8%, and shares since the acquisitions of insiders have managed to fall in price, due to which the value has become even slightly larger.
Certainly, not a fact, that the shares of the manufacturer of weapons and goods for campers will show returns on 9% per annum above the S index&P 500. But the signal is positive..
Management in the same boat with investors. A requirement is sewn into the formula for calculating the final remuneration of management: the company's shares, taking into account the payment of dividends, must show profitability on 5% above, than the index Russell 2000, so that management can expect to be rewarded. Usually the situation in companies is different: the management is breathing – already an excuse, to issue options.
The company was recently spun off. Researchers have long discovered the anomaly: when a division is spun off into a separate company, then at a distance of 22-27 months, its shares show increased profitability relative to benchmarks..
I, certainly, I don't hint at anything, but American Outdoor Brands spun off smith & Wesson 21 August 2020. 22 months from the date of allocation will come 12 June 2022, and 27 months — 9 November 2022.
The average return on shares of the spun-off company is about 32% behind 22 months. Further, the yield does not exceed the benchmark, that is, it usually makes no sense to hold such shares.
Since the spin-off, American Outdoor shares have already shown profitability in 53% per annum. There is a possibility, that the yield at a distance of 22-27 months will be even higher, considering other positive signals.
What's the bottom line?
American Outdoor Brands is a strong business, which should grow organically due to pleasant conjuncture and possible acquisitions. Fortunately, the money on them is as their own, and borrowed. Management bets on business growth, therefore, it is not worth waiting for dividends.
Probably, the company will meet with the problem of supply failure, due to which sales may temporarily fall or growth rates will greatly decrease. But there are positive signals.: the company's executives have recently purchased a substantial amount of shares.
I don't like it, that part of the company's strategy is acquisitions, because most of these transactions do not create value for the buyer. Check the effectiveness of previous deals, in which the CEO participated, I didn't succeed. In spite of this, I plan to buy shares of the company in the coming days and hold approximately 200 days, if the situation does not change radically.
