This Manufacturing Stock Is Going Off Target. Are Its Rivals Now a Buy?

The firearms industry is in the midst of a years-long ammunition shortage that was borne out of record-breaking demand, the pandemic, and supply chain issues. But the shortage might be about to get infinitely worse.

Specialty chemicals manufacturer Olin (OLN 3.00%), which also makes the well-regarded Winchester brand of ammo, may no longer be able to sell some of its most popular caliber rounds to the public. The rumored change is spurred by the US Army, which has recently sought to rewrite its agreement with the ammo maker for its Lake City Army Ammunition Plant in Missouri.

Because the plant supplies as much as 30% of the consumer market for 5.56 millimeter rounds (also known as 5.56 NATO ammo), one of the most popular calibers of ammunition, closing off access to the public would exacerbate the shortage. While in theory it could boost sales for other manufacturers, they’re already constrained by trying to keep ammo on the shelves so the change would lead to the cost of ammunition skyrocketing even further.

Image source: Getty Images.

Targeted for control

Under Olin’s contract with the Army, which it won in 2020, it manages and operates the government-owned facility to manufacture small caliber ammunition for the military, including 5.56 NATO, 7.62 NATO, and .50 caliber rounds. It is also allowed to sell any excess ammo produced into the civilian market. Not being able to do so would be a big blow to Olin because commercial sales are especially profitable, particularly in the current shortage environment.

Olin reported first-quarter ammo sales jumped nearly 10% compared to a year ago, a significant gain considering last year had doubled from 2020. Its gains this year, though, were almost entirely due to price inflation in the commercial market as demand still far outstrips supply. Around 60 million recreational shooters are currently vying for ammo that now routinely costs $1 or more per round.

The Winchester segment recorded its highest quarterly earnings before interest, taxes, depreciation, and amortization (EBITDA) in the company’s history as a result. First quarter earnings for the Winchester segment were $118.9 million compared to $85.1 million in the first quarter of 2021, a gain of 39.7%, and Olin said it expect segment performance to be similar in the second quarter.

Potential profits for others

Losing the ability to sell the Lake City ammo would cut into Olin’s bottom line, but it could boost profits at rival manufacturers like Vista Outdoor (VSTO 2.40%), Ammo (POWW 1.21%)Hornady Manufacturing, and others that also produce such rounds.

Because the Lake City plant represents such a large chunk of the market, it would be difficult for other ammo makers to fill the void, but may lead to a further increase in pricing and profits.

Vista is preparing to spin off its ammo business into a separate publicly traded company. It makes the top-selling Federal Premium brand of ammo, as well as Speer, and also acquired the Remington brand out of bankruptcy. It’s already a significant manufacturer of 5.56 NATO rounds, particularly for the Army, for which it has received various contracts, and for the FBI under a five-year contract that was awarded last year.

Ammunition sales at Vista jumped 55% last year to $1.7 billion, gross profits surged 128% to $712 million, and operating profits were up 170% to $600 million as consumer demand and higher prices drove favorable trends up even more.

A shot at making a name for itself

Similarly, smaller rival Ammo could benefit as its new 160,000 square foot production facility is almost set to go live. It will triple the ammunition maker’s production footprint.

Ammo is also a vertically integrated operator, making the brass casings for each round. It currently has the capacity to produce 750 million pieces of brass and can scale it to 1 billion rounds annually.

Moreover, it acquired the marketplace last year that is dedicated to firearms, hunting, shooting and related products, though it sells none of the products itself. It could give Ammo a more direct venue for selling its ammunition online.

A stock to shoot out the lights

Where Ammo stock is valued at 15 times earnings and more than two times its sales, Vista Outdoor trades at four times earnings, a fraction of its sales, and just six times the free cash flow it produces.

Although Olin’s stock is similarly discounted as Vista, the potential loss of ammo sales from the Lake City plant could weigh heavily on its shares, making Vista Outdoor the best stock for investors to target for growth.

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