Sales of guns and ammunition have been on a tear since the '08 Presidential election, but data suggests the trend is slowing and the industry is about to face the toughest comps in recent history. While it’s unclear if this trend will continue one thing is clear – Cerberus is joining in the 'Banker Bonanza' with an IPO of the Freedom Group.
The WSJ reported last week that Cerberus is in “advanced preparations” for an IPO of the Freedom Group, a rollup of firearm companies including Remington Arms Co., Bushmaster Firearms, and at least 5 others over the last 3-years. According to the S-1, the combined entity commands a dominant leadership position in shotguns, rifles, and ammunition (see table below). Smith & Wesson (SWHC), the better known public player in the space, is the market leader in handguns.
The surge in industry sales has been driven by consumer fear that President Obama could back legislation banning gun sales and placing a hefty tax on ammunitions. If you aren’t an avid hunter, ask someone who is about the price of ammunition. Chances are they’ve been stockpiling it like the rest of country. The figures I’ve heard don’t suggest a 20% - 30% increase, or even a 50% hike, but rather a multiplier that could catapult the cost for a box of rounds from $8 on average to $20-$30 – that’s not a rounding error change. Anecdotally, during our visit with management at Dick’s Sporting Goods there was no indication that demand had slowed for ammunition and the industry generally remains in short supply.
As it relates to demand for guns, data suggests trends are indeed cooling. One of the most commonly used indicators of demand is the FBI's National Instant Criminal Background Check System (NICS), a federal database used by licensed firearms dealers who are required to run background checks on prospective buyers. The chart below says it all – while the number of background checks increase, the rate of growth is slowing on the margin and comps are about to get a whole lot harder.
A quick glance at the S-1 filing reveals that at $800mm+ in annual revenues, the Freedom Group is roughly twice the size of its next closest public competitor in Smith & Wesson and the most fitting ‘pure play’ on the “Obama Effect.” The company also boasts a more attractive margin profile with EBIT of 15% vs. SWHC at 10% over the LTM. While it remains unclear if these trends are going to continue, the road ahead is clearly more challenging. Taking these factors into consideration, I’d rather be selling the trend than an IPO into it.