AMMO Inc. (NASDAQ: POWW) stock spiked on Monday after news broke that US Department of State (DOS) announced that it will soon prohibit the importation of Russian ammunition into the United States. According to a release on the DOS website, "[n]ew and pending permit applications for the permanent importation of firearms and ammunition manufactured or located in Russia will be subject to a policy of denial." That order, in no uncertain terms, is huge news for AMMO. Even better, it increases the already substantial revenue-generating tailwind at its back.
Business is good. Beyond its record-setting revenues, AMMO also has a backlog of orders that reached $238 million at the end of the last quarter. And since the DOS policy intends to prohibit the importation of both firearms and ammunition, that number will likely increase. While backlogs don't equate to cash just yet, they will. So, not only should AMMO get a boost in business resulting from the order, visibility into its revenue-generating future is extended as well.
Keep this in mind, too. While ammunition exports to the United States may represent a small percentage of the GDP of the Russian Federation, Russian-origin ammo makes up a substantial part of the American ammunition supply. Factor in that the American gun markets already suffer from demand exceeding the available supply, AMMO can reap the benefits inherent from a seller's market.
Moreover, analysts expect this aggressive move by the Biden Administration to do at least two things- worsen the present supply problems and strengthen an already booming market. Both are advantageous to AMMO, Inc.
Best of all, at least for AMMO, once the full effect of the policy is realized, expect more ammunition shortages, higher prices, and a potential rush for gun owners, and prospective ones, to secure equipment and supplies ahead of the order. With the mandate expected to commence on September 7th and remain effective for at least 12-months, the enhanced market opportunities for AMMO are in play in a matter of weeks.
Hence, AMMO's guidance for $210 million in revenues this year may prove light. And its 5% jump on Monday may barely scratch the surface of what's in store in terms of future sales.
Restricting Imports Adds Fuel To Growth
In addition to putting another revenue beat in its sights, the expected surge in demand could lead to an expansion of already impressive gross margins, making AMMO's expected $51 million in revenues this quarter more impactful.
By the way, results for FYQ2 will follow a record-setting quarter for both revenues and EPS, where AMMO posted a NET INCOME of $9.5 million that crushed its ($3.1 million) loss in the same period last year. Adjusted EBITDA also posted record levels.
And guidance is strong. Management increased its Q2 guidance by 12% and noted sales momentum is active into the current quarter from core ammunition sales were up more than three-fold. Notably, more than $12 million of high-margin marketplace revenue came through its Gunbroker.com acquisition, which is still not fully integrated into its sales channels.
Also of note, AMMO said to expect a potentially big announcement no later than the first part of September. Speculation is that the company is close to inking a major deal in the military and defense sector. Investor eyes should remain on that target.
Of course, demand is only valuable to companies that can meet it. AMMO can. They are near completion of a new facility that can add 4X the production capacity from current levels. Thus, the $238 million in backlogs could translate into high-impact revenues faster than many think.
Ammunition Markets Stressed
Moreover, from a more macro market view, the ammunition shortages across the United States are taking a market toll, evidenced by empty store shelves across the country. And every outlet from big box to the small retailer is affected. Add to that the near-unprecedented levels of new gun permits, expect the sales pipeline at AMMO to maintain its robust stature for the next several quarters, at least.
Better still, when its new facility is running at full capacity, AMMO will meet demand running from its retail presence in more than 1600 direct-to-consumer locations. Further, its integration of Gunbroker.com and targeting its roughly six million active users positions AMMO for a transformational surge in revenues.
Also notable to future revenue expectations for AMMO is that despite the massive active user base at Gunbroker.com, ammunition sales accounted for only 3% of its revenues last year. Hence, AMMO inherits an enormous revenue-generating opportunity from that captured market alone. Even better, tapping into even a small percentage of that six-million-member group could deliver substantial revenues.
In fact, based on an article published in GQ Magazine saying that the average gun owner spends roughly $250 per year on ammunition, supplies, and training, reaching just 15% of Gunbroker.com's active user base could generate upwards of $225 million in retail sales. Hitting that low-hanging target is certainly not out of the question. And with gun owners getting squeezed during the ongoing political warfare, an acceleration in near-term demand from that group is also in play.
Still, while the above presents a massive blue-sky opportunity, AMMO is no small player despite its small-cap share price. Its transformational $240 million acquisition of Gunbroker.com proved that point.
Growing Wholesale and Retail Client Base
In fact, AMMO is already considered a top-five supplier, targeting law enforcement, military, and consumer markets with competitive passion. Further, its direct-to-consumer sales model combined positions AMMO to sell more than 750 million rounds of ammunition this year. And that's not including a potential near-term military contract that could exponentially increase those totals within the next thirty days. The combined market opportunity from those three targets alone presents a more than $32 billion proposition. But, it's rising.
Thus, AMMO stock remains a bargain despite its impressive gain on Monday. And with news of ammunition markets tightening, its 52-week high of $10.37 is back in its scope.
Better yet, with AMMO posting record sales, highest ever profits, and a backlog that is near $240 million, the gap between record highs and current prices is likely to close quickly. And even reclaiming its 52-week high represents a more than 37% gain from today's intraday level. Frankly, even that level lowballs the intrinsic value in its portfolio.
Thus, even for investors that missed AMMO's 115% YTD gain, there's plenty of upside in the stock. And with the AMMO, Inc. founder believing his company can reach upwards of $400 million in sales within three years, the upside could be exponentially higher.
Bottom line- for investors that look for value and buy growth, AMMO stock should be in the crosshairs. More importantly, with the company accelerating its revenue and EPS growth considerably, pulling the trigger on that consideration sooner instead of later may be a wise decision.
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