Why Ammo Stock Just Exploded Higher

What happened

Firearms enthusiasts might call it “two great tastes that taste great together.” Ammunition manufacturer Ammo  intends to acquire GunBroker.com — and Ammo stock is exploding on the news.

So what

At 11:50 a.m. EST on Thursday, shares of Ammo stock are up an astounding 20.9% in response to the company’s announcement that it may buy leading online firearms marketplace GunBroker.com. As Ammo advised, it has signed a “non-binding letter of intent” to acquire GunBroker.com from its parent company, IA Tech LLC.

Finalizing the purchase will be contingent upon what Ammo finds after conducting due diligence on its proposed prize, as well as negotiating a “definitive agreement” for the purchase, getting regulatory approval and… raising enough cash to buy the company. (After all, at last report Ammo only had about $3 million in the bank.)

Assuming the deal goes through, however, Ammo will pay “approximately” $240 million to acquire GunBroker.com, and close the transaction “on or before March 31, 2021.”

Now what

Now, is this a good deal for Ammo and its shareholders? Is it a good reason to buy the stock?

Ammo describes GunBroker.com as “the world’s largest online auction marketplace dedicated to firearms, hunting, shooting, and related products,” with 6 million registered users, $60 million in annual revenue, $40 million in earnings before interest, taxes, depreciation, and amortization (EBITDA), and “positive net income and strong free cash flow” to boot.

Thus, at the purchase price named, Ammo will be paying four times sales — which makes it look like a very good deal relative to Ammo’s own price-to-sales ratio of 19.8. Additionally, GunBroker.com is said to be profitable (while Ammo is not), and valued at about six times EBITDA.

Assuming Ammo can seal the deal at the stated price, this looks like a very nice tuck-in acquisition for the company, to me.