Earnings Preview: Improving gun market could lift Q3 American Outdoor earnings

As the firearms market is recovering from the doldrums, American Outdoor Brands (NASDAQ: AOBC) is slated to report its third-quarter results on February 28, after the bell. Investors are expecting the firearms maker to beat the consensus due to improving gun market scenario and rising outdoor product sales.

For the Q3 period, analysts are expecting American Outdoor to report earnings of $0.12 per share, an increase of 33% over the prior year period. On the sales front, street forecasts a modest 2% growth to $160.9 million.  Analysts are upbeat about the future prospects of the firm and have set a price target of $14.88 with a “Buy” rating for the AOBC stock.

In the recently reported quarter, the Smith & Wesson gun maker has guided third quarter top line to be in the range of $155 million to $165 million and adjusted EPS to be between $0.09 and $0.13. For the fiscal 2019 period, sales is expected to come in at $625 to $635 million and Non-GAAP earnings of $0.69 to $0.73 per share. It would be interesting to see whether American Outdoor is lifting the outlook for the fiscal period taking into account the improving gun market.

For the second quarter, the company reported better-than-expected results backed by the solid performance from the outdoor and firearms division. Adjusted EPS surged 82% on 9% sales growth of $161.7 million. However, free cash flow came in at a negative 13 million. Investors would be hoping that the handgun maker improves its free cash flow position in the third quarter.

Strategic Shift

It’s worth to recall that in 2016, the firearms maker decided to change its name to synch with the strategic shift taken by the firm. As a result, the company renamed from Smith & Wesson Holding Corporation to American Outdoor Brands Corporation. The primary reason attributed by the management was to diversify itself from firearms business to focus on other related opportunities like outdoor-related offerings.

Investors agreed to the rationale of the shift as it would help American Outdoor to reduce its dependency on the vagaries of the gun market. It’s a known fact that the firearms industry is cyclical in nature. In addition, it has political, regulatory and other macro risks associated with it.

Related: Vista Outdoor Q3 2019 Earnings Transcript

Fast forward to 2018, the shift in the business strategy seems to be working. At the end of last fiscal, outdoor related products brought in 26% to the top line. It grew from nothing over the last four years. However, firearms division still brings in more than 70% of sales, which is expected to come down in the near future.

In order to beef up its outdoor product line, American Outdoor had acquired two firms in 2017 namely Gemtech and Bubba Blade helping it augment the suppressors and knife product line. Following the same path, last month the company acquired LaserLyte known for its laser sight products. These deals are going to augur well in the long-term to make sure the diversification plan is on track, and improve shareholder value in the years to come.

American Outdoor’s stock has inched up over 36% in the last 12 months and is almost flat in 2019.