Ammo, Inc. (POWW) plans on spinning off to shareholders its ammunition manufacturing business sometime in 2023. This presents an interesting value play for investors as they will receive an equal share in both companies.

For example, POWW stock is now cheap at 13.1x fiscal 2023 earnings (ending March 2023) and less than 4x adj. EBITDA. Moreover, investors can buy the Series A preferred stock now (POWWP) and earn a secure 8.73% preferred dividend.

In the past several years the company has grown quickly as can be seen in the table I have prepared below.

The Spinoff and Proxy Battle

In addition, the company is growing quickly. Management provided a sales forecast of between $300 to $310 million for the year ending March 31, 2003. If that happens it will represent 36.6% growth over the $240 million in sales last fiscal year.

The spinoff ammo company will be renamed Action Outdoor Sports. It just opened a state-of-the-art ammo manufacturing plant in Manitowoc, WI. That leaves its gun auction/marketplace business, including www.GunBroker.com, which claims to be the largest firearms and shooting sports online site It will be renamed Outdoor Online.

Thus, both companies will have new with no link to “guns”, “ammo” and the like. This is a marketing action that helps direct attention away from controversial aspects of its business.

Ammo, Inc. management has spent a lot of time and effort describing the spinoff rationale. On Aug. 25, CEO Fred Wagenhals sent a letter to shareholders describing the reasons. Most of these are related to increasing shareholder value. This is interesting since companies are fairly small entities and they will have to bear extra costs, both from the spinoff and as separate public companies. Moreover, Ammo, inc. bought the GunBroker.com business last year and it immediately brought profitability to the company. So the spinoff now seems to be fairly quick.

On Aug. 29 it become clear that there is internal strife. Steve Urvan, the original owner of GunBroker.com, who sold it to Ammo keeping a 17.1% stake in the combined company, made a public letter to shareholders. He painted a different picture of the situation at the company and seemed to question the need for a spinoff. Instead, he wants to replace the board with his own slate of directors at the upcoming annual meeting.

This is likely to be quite an interesting proxy battle. For one, the date of the annual meeting, which last year was held on Oct. 25, has not yet been announced (typically a month or so ahead of time). Second, the Chairman and CEO Wagenhals owns just 6.1% of the company and other insiders have about 1.1% or 7.2% at most. That is less than half of the amount that the Urvan group has.

Third, the battle heated up on Sept. 6, when Ammo put Steve Urvan, who was working as Chief Strategy Officer (and also a director) on administrative leave, along with the CFO of GunBroker.com, Susan Lokey. The company accused the pair of misconduct and said they “may have misappropriated the Company’s data and digital assets and transmitted that data to a third party controlled by Mr. Urvan and with which Ms. Lokey is associated.”

Where This Leaves Investors in AMMO Stock

As a result, AMMO stock has been volatile. After peaking at $6.00 on Aug. 12, just prior to the spinoff announcement on Aug. 25, AMMO stock has cratered.

This can be seen in the chart above from Barchart.com. It recently hit a low of $2.90 on Oct. 3, but has subsequently drifted higher to $3.23 as of Tuesday, Oct. 25.

In addition, the preferred stock, with the symbol POWWP, trades for $25.07. It pays out an annual 8.75% coupon or $2.1875 per share. So, at today’s price slightly over par of $25.00 per share, the effective yield is 8.73%.

However, the preferred stock (POWWP) is not convertible into POWW common stock shares. Nevertheless, investors might want to take a position in the preferred stock. This could be done in conjunction with an investment in the cheap common stock POWW shares, at least until it becomes clear whether the proposed spin-off will occur.

As it stands, it is not clear to investors why, after the company bought the gunbroker.com site last year it now wants to separate it from the main ammunition company. The most logical reason seems to be that the two parties can’t get along. That’s unfortunate since together these two companies would have lower public company operating expenses.

And it’s not like one company is growing fast and the other isn’t. Both companies have good outlooks. For example, slide 3 of the company’s recently released slide presentation on Sept. 27 shows that both Action Outdoor Sports (i.e., the manufacturing ammunition company) is expected to show 37% YoY growth this fiscal year (ending March 2023). In addition, Outdoor Online (i.e., Gunbroker.com) will show 34% YoY growth.
 

Source: Slide presentation, page 3
 

Moreover, the company projects $109.5 million adj. EBITDA this year, although it does not break out which company will provide the majority of that cash flow.

Given this situation, it seems that investors will do well to hold on to both shares, should the spinoff actually be approved and completed. This is contrary to what often happens when shareholders often see the new stock in their portfolio and then sell the shares. In this case, both companies will have new names and likely new symbols.

The bottom line here: POWW stock looks very interesting here, as it is very cheap and the likelihood of a break up into two units could potentially provide buying opportunities for both stocks. In the meantime, look at the preferred stock as well, POWWP, as it yields 8.73%.

Related Article:
AMMO Inc. Aims To Take Business To The Next Level

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