For all the public outrage following the mass shooting in Florida, Wall Street analysts aren't worried about the prospects of American Outdoor Brands Corp., the gunmaker formerly known as Smith & Wesson and a sort of bellwether for firearms manufacturers now facing a firestorm.
The company's shares have fallen in trading since law enforcement identified the semi-automatic AR-15 assault rifle used in the Parkland, Fla., school shooting as an American Outdoor product. Shares are down 4.5 per cent from the day before the Feb. 14 shooting through Monday's close and have now dropped 24 per cent since the start of the year. The company reports its third quarter earnings on March 1.
The blowback from the shooting, which left 17 dead and prompted President Donald Trump to begin discussing gun control, constitutes "an unprecedented number of crosswinds affecting not only demand but perception," wrote Wedbush Securities Inc., a securities firm and investment bank, in a report about American Outdoor released on Tuesday morning. But the firm is predicting a strong rebound over the coming months: "[W]e continue to believe that these shares represent significant long-term value, as firearm demand is going nowhere, and the current series of events is likely to eventually give way to a much-more favorable operating environment."
The attack led to public outcry against the firearms industry, including a social media movement calling on companies who offer discounts to National Rifle Association members to cut ties with the Second Amendment rights group. The Florida Education Association, upon discovering their pensions were invested in publicly traded firearms companies, called on those that manage the fund to dump the stocks.
Financial institutions also found themselves embroiled in the nationwide gun debate. Bank of America Corp. over the weekend said it will engage with clients "that manufacture assault weapons for non-military use to understand what they can contribute to this shared responsibility."
BlackRock Inc. is the largest shareholder of both American Outdoor Brands and Sturm, Ruger & Company, Inc. "Given our inability to sell shares of a company in an index, even if we disagree with management, we focus on engaging with the company and understanding how they are responding to society's expectations of them," BlackRock spokesman Ed Sweeney said last week. "We will be engaging with weapons manufacturers and distributors to understand their response to recent events."
In the new report, Wedbush said it was "more difficult" to assess the impact the shooting had on investors: "While BlackRock stated it would not sell off its shares in the gun companies, it did not indicate what changes it might seek from the companies, so it will be interesting to see what comes of these discussions."
Following the Parkland shooting, Florida Governor Rick Scott said he would support some gun regulations, such as raising the purchasing age to 21, banning the sale of bump stocks, and allowing courts to prohibit the mentally ill from purchasing firearms. President Trump has also discussed raising the purchasing age, banning bump stocks, and expanding the background-check system to take into consideration mental health.
"While the election seemed to eliminate gun control talk for the time being, the unfortunate reality in the modern world is that tragic events such as this are always just around the corner to reopen debate," Wedbush wrote in the report. Examining how gun control would impact the firearms industry, Wedbush ranked the likelihood of expanded background checks as moderate and the likelihood of strengthening the background-check system as moderate to high.
Expanding the checks, Wedbush said, would have a neutral or positive impact on American Outdoor Brands if passed, while strengthening the system would have a neutral impact.
The two forms of gun-control legislation that Wedbush argued would have negative impact on the company were a new assault weapons ban and increased liability. To expose gunmakers to heightened liability risks, lawmakers would have to repeal the 2005 Protection of Lawful Commerce in Arms Act, which prevents manufacturers from being held liable for crimes committed using their weapons.
Outside of fears of gun control and public outcry, the firearms industry is continuing to face the tail end of an inventory struggle. "The large uptick in orders from retailers ahead of the 2016 election resulted in a glut of inventory at the dealer and distributor level as demand returned to a more normalized level in the new gun friendly political environment," the Wedbush report stated. Sales promotions have helped cut into this supply glut, but "industrywide inventory remains heightened."
Wedbush maintained their outperform rating for American Outdoor Brands, though it lowered the price target from $19.50 to $15. The stock traded at $9.43 a share at 10:28 a.m. in New York Tuesday. The industry, Wedbush concludes, "is showing no signs of going away as underlying demand for guns remains."