Is Ammo Inc. (POWW) A Good Ammunition Stock to Buy as We Head Into Hunting Season?

The COVID-19 pandemic coupled with a surge in gun sales have created a scarcity of ammunition in the United States which has affected recreational shooters as well as law enforcement personnel. According to the National Shooting Sports Foundation (NSSF), gun sales climbed in 2020 by over 21 million, which is 64% higher than 2019 levels. 

Small Arms Analytics and Forecasting reports that even though firearms sales have decreased 25.4%, compared to this point in 2020, it is still well above the pre-pandemic levels. In addition, the global ammunition industry is projected to grow at a CAGR of 3.6% between 2020-2025, reaching $24.9 billion in the final year.

Keeping this in mind, today, I am going to analyze AMMO, Inc. (POWW) to determine whether it is a wise investment amid the ammunition shortage. 

Company Overview 

Founded in 2016, AMMO, Inc. is a company that engages in the production of high-performance ammunition and components for the army, law enforcement, self-defense and sport shooting.

Since the beginning of the year, shares of ammunition-maker have increased 91%, outperforming the SPDR S&P 500 Trust ETF, (SPY), which has gained 18% over the same period. 

Recent‌ ‌Developments‌ ‌ ‌

On August 27th, the company announced a quarterly dividend on its Series A Preferred Stock. The cash dividend of $0.2412 per Series A share was paid on September 15th, translating into a constant yield of 8.75%. 

Recent Financial Results

Ammo’s revenues for its fiscal first quarter, ended June 30, 2021, increased 360.4% year-over-year to $44.47 million, beating the Wall Street consensus by $0.44 million. 

The company’s net income has been reported at $9.54 million, representing a significant improvement compared to its year-ago loss of $3.1 million. As a result, POWW’s non-GAAP EPS increased to $0.13, beating analysts’ expectations by $0.06.  

Due to stellar revenue growth, management increased its full-year revenue guidance to about $210 million, up $20 million from the previous forecast. When it comes to the second-quarter estimates, analysts expect Ammo’s EPS to stand at $0.1. Additionally, a $52.6 million consensus revenue projection for the third quarter implies an enormous 337.9% growth compared to the year-prior quarter. 

Finally, the analysts’ current year average EPS estimate of $0.41 indicates a Forward P/E ratio of 15.28x, which is lower than the sector median of 16.08x. The company also trades with a discount based on its 2022e P/E of 14.41x.

POWW Institutional Ownership 

Institutional ownership stands at about 28% of Ammo’s diluted shares. Most of this is Hood River Capital Management LLC, which holds around 5.26 million shares or 4.65%. Next are BlackRock Fund Advisors and Tealwood Asset Management, Inc. Their stakes come in at about 3.67% and 3.32%, respectively. 

Moreover, “smart money” is gaining interest in the company, as evidenced by its recent transactions. For instance, one of the POWW’s largest shareholders, BlackRock Fund Advisors, recently bought 3.2 Million shares of Ammo. According to CNN Business, approximately 7.62 million shares were bought by institutions, and only 0.38 million shares were sold during the first quarter of fiscal 2022. As a result, the buy/sell ratio stood at 19.9x, which emphasizes that institutions are actively betting on POWW stock. 

How much volatility are options traders expect for the stock? 

Taking a closer look at the October 15th, 2021 option chain, we can calculate that POWW stock could rise or fall by about 46.5% by the October expirations from the $7.50 strike price using the long straddle strategy.

Also, the number of open calls at the $7.50 strike price outweighs the open puts by around 3x, suggesting a bullish options market sentiment.

Conclusion

AMMO, Inc. is a fast-growing ammunition company that has attracted institutional and retail investors amid a scarcity of ammunition in the United States caused by a gun sales spike during the COVID-19 pandemic. As we enter the Autumn hunting season, I believe POWW is a Buy.

The company looks discounted based on a P/E multiple while demonstrating three-fold revenue growth rates. And the options market implies a bullish sentiment for the stock. 

In addition, analysts give POWW an average price target of $11.50, representing about 80% upside from current prices.