It may be a new year, but the social debates of 2015 haven’t gone anywhere. Gun control is still in the forefront of many Americans’ minds — just look at President Obama’s emotional speech this week on the need for gun reform, or the group of armed protesters currently holed up in Burns, Ore.
While rumors and speculation on the future of the industry percolate into gun stock prices this week, I wanted to take a closer look at the sector through the lens of Cabela’s (CAB), one of my top gun retailer picks.
CAB specializes in hunting supplies and other outdoor recreational merchandise, making it a one-stop shop for those who like to fish, camp and shoot. Sporting goods is one of the best categories in retail right now, growing overall sales 4%-6% against a flat top line for all retail combined. This is where all the action really is in shopping malls.
Cabela’s Prepared for Gun Control Controversy
CAB is an interesting place in the category, though, because product mix is geared away from golf and tennis and more toward wilderness — meaning gun sales make up a big piece of the pie. As a result, the company — and CAB stock — has benefited from the post-San Bernardino firearms craze and could see sales on that side continue to boom now that President Obama’s executive orders are on the table, encouraging nervous gun buffs to hoard while they can.
The company deliberately overstocked assault rifles going into the 2012 election cycle and was rewarded handsomely. Now, with yet another election cycle looming and similar conversations on gun reform bubbling up in the background, there’s a strong tailwind for current overall quarterly sales. It should be enough to turn what’s usually a so-so first quarter into something more exciting (and profitable).
Cabela’s Might Be an Acquisition Target
There’s also a chance CAB could get bought out this year, as the company is on the radar of private equity firms. That potential for a bid should put a floor under CAB stock — if the company gets cheap enough, the buyout math gets even more compelling.
Now for the not-so-good news: Cabela’s already has a ton of debt, and CAB stock sells at 18X EV/EBITDA, which isn’t really the kind of multiple private equity likes. Profitability was slightly down in 2015, and the company is burning cash after capital expenditures.
We’re in a new ball game with yields increasing in high-yield debt, so the buyout talk we’ve been hearing should be taken with a grain of salt. Plus, gun demand tends to fluctuate, and while we’re seeing a substantial spike right now, given the charged atmosphere, that could change once Obama sets his plans into motion.
The larger conversation on gun reform more or less dictates how stocks like these perform, so if you’re a fan of CAB stock, like I am, it’s best to keep a watchful eye as the narrative evolves.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
