A-Mark Precious Metals: A True Value Stock (NASDAQ:AMRK)

Investment Thesis

Over the previous few weeks, retailer of worth belongings have been on a bullish development as soon as once more, whether or not bodily or digital. Precious metals have lengthy crushed the market throughout inflation prior to now. But now we see one other distinguished participant with a trillion-dollar market cap competing in opposition to these shiny metals; Bitcoin.

While bitcoin has gained respect amongst millennials and younger buyers as a wager in opposition to inflation, older generations just like the boomers are largely nonetheless cynical about its intrinsic worth. But does that imply belongings like valuable metals will be unable to carry out nicely sooner or later as an inflation hedge? No, this alludes that these corporations which is able to settle for the presence of one other retailer of worth asset, and improvise with time, shall stay within the trade and thrive.

With its deal with retail buyers, A-Mark Precious Metals (NASDAQ:AMRK) will probably be a significant participant within the valuable metals trade in the long term.

Source: Fortune

A-Mark Precious Metals, a NASDAQ-listed firm, has proven nice efficiency prior to now three years, outpacing the S&P 500’s worth return by 14% and the Dow Jones Precious steel index (DJGSP) by an exceptional 20% YTD.

The firm’s distinctive monetary efficiency is a front-seat driver of this acquire because it generated a document income of $8.2 billion within the TTM that led to March 2022.

With a ahead P/E ratio of three.83x, in comparison with its sector median of 10.15x, I fee A-Mark Precious Metals as a purchase as a result of its inherent nature of being a worth stock with immense development prospects.

Company Overview

A-Mark valuable metals Inc. is engaged in bullion buying and selling of valuable metals resembling gold, silver, platinum, copper, and quite a few cash and different merchandise through a portfolio of channels.

The firm has a well-diversified buyer base, together with sellers, monetary establishments, sovereign mints, refiners, brokers, buyers, and retail clients. It has been within the valuable steel enterprise since 1965, with a portfolio of over 200 merchandise to supply.

The firm generates income by the next three segments:

E-Commerce (Direct to Consumer): AMRK’s two main subsidiaries, JM Bullion and Goldline, function on this section to supply valuable steel merchandise to direct shoppers. In the previous three years, the retail sector has been the corporate’s core focus with the intent of digitization of valuable steel bars and increasing its retail buyer base through e-commerce acquisitions.

Wholesale: A-Mark operates on this section to buy and distribute valuable metals from sovereign and personal mints, largely within the US. However, it “has long-standing distributorships with other sovereign mints, including Australia, Austria, Canada, China, Mexico, South Africa, and the United Kingdom.”

Secured Lending: A-Mark has two subsidiaries working on this class for originating and securing loans by bullion and numismatic coins. Revenue era from this section is generally by curiosity earnings.

Transition Towards Direct to Consumer (D2C)

During the earlier 5 years, A-Mark has revamped three acquisitions, Silver Gold Bull, JM Bullion, and Goldline. AMRK’s enterprise selections have yielded fruitful outcomes with the technique to develop its retail operations and construct a vertically built-in valuable steel platform. The firm has expanded its buyer base exponentially with an over 11 instances YoY development, predominantly dictated by the JM Bullion acquisition in March 2021.

JM Bullion is an e-commerce retailer of valuable metals, working 5 individually branded, company-owned web sites focusing on particular niches throughout the valuable metals market. Its success has been one of many many causes for AMRK’s latest uphill journey as the corporate absorbs many achievements in its portfolio, together with being ranked 40th within the Inc journal’s 2016 checklist of the fastest-growing privately held corporations within the United States.

This aggressive transfer has grown the D2C section’s contribution to whole income from about 5% in Q1 2021 to over 27% in Q1 2022. The surge in inflation and gold costs because the pandemic have additionally positively impacted its ascent.

Latest E-Commerce Move: Silver Gold Bull

More not too long ago, A-Mark has entered into an settlement to amass an equity curiosity in Calgary-based Silver Gold Bull Inc. for about $44.0 million, proudly owning 40% of excellent shares in SGB. The proposed funding will deliver A-Mark’s possession in SGB to 47.4%, as the corporate beforehand owned 7.4% shares again in 2014. The settlement additionally grants AMRK the precise to extend its curiosity within the firm as much as 75% within the subsequent 18 to 27 months.

Silver Gold Bull generated a income of $650 million in 2021 with a gross and web margin of 6.5% and 4.2%, rising its YoY gross sales quantity by 47.5% for silver and 29% for gold, indicating a bullishly trending market demand. Its buyer base additionally grew considerably through the 12 months with a 48% YoY buyer improve, totaling over 270 thousand clients. With this acquisition, A-Mark expects to additional develop its D2C footprint within the worldwide markets.

Cyber Metals – Digitizing Gold

There has been a revolution in monetary markets, with modern merchandise and industries gaining momentum prior to now few years. The younger era has been extra receptive to the idea of fractionalization and digital possession of belongings. AMRK has additionally not too long ago introduced a digital platform that digitizes massive gold, silver, and platinum bars and permits shoppers to purchase and promote fractional shares of those bars in varied denominations.

Upon unveiling this new mission, CEO A-Mark Greg Roberts stated,

We are excited to unveil CyberMetals as we imagine it’s an modern product providing that can entice new valuable metals clients from beforehand untapped sources whereas decreasing friction for valuable metals possession.”

It’s not hard to bridge together that AMRK has been making bold decisions like introducing cyber metals and shifting its target market from boomers to millennials and Gen Z. The company has also invested in digital assets (cryptocurrencies), which had a carrying value of $0.2 million as of the MRQ.

Financial Status

The company’s financial performance is healthy with prospects of sustainable growth. It demonstrated an over 33% YoY growth in the MRQ, primarily driven by its strategic focus on the e-commerce platforms, specifically the JM Bullion and Goldline transactions.

The EBIT margins are significantly lower than its peer average of 21.92%, which is attributable to JM Bullion’s consolidation in AMRK’s books. It appears that AMRK aims to generate profit through a large number of transactions per customer rather than a high margin per transaction, as is apparent from the significant increase in its ticketing volume.

The company could significantly improve its profitability by improving its margins, considering the volume growth it has achieved. A detailed transaction price sensitivity analysis could help the company find a sweet spot between increasing its margins while avoiding losing its volume growth.

Observing its EPS trend, AMRK has impressively beaten 7 out of the 8 previous analyst estimates. The diluted EPS significantly slipped from $8.84 to $3.06 YoY in the MRQ because of a two-for-one split of A-Mark’s common stock in the form of a stock dividend, to make ownership more accessible to employees and investors. The normalized EPS also slid from $5.55 to $4.74, due to a higher D&A charge from $0.4 million to $7.5 million and a higher effective tax rate from 11.3% to 18.2%.

Valuation

The stock is showing signs of serious undervaluation with its revenue metrics, like the P/S ratio of 0.09x and the EV-to-Sales ratio of 0.16x, compared to the sector medians of 2.96x and 2.62x.

Overall, the company appears significantly undervalued using individual relative valuation metrics, except through the P/CF ratio of 26.40, which is almost 2.5 times higher than its peer group. Given the expected FCF per share growth of 28.25% and an OCF growth of 28.74% during the year, the valuation numbers are also likely to improve and shouldn’t be considered in isolation as a deterrent.

Averaging out the company’s metrics to sector median outputs a price tag of around $50, exposing an upside potential of about 65%. I have excluded the forward and TTM-based sales figures from my calculations due to the outlier effect attached to those numbers, which results in unrealistic estimates. The $50 price per share is lower than analyst expectations of around $60 but appears more realistic given the overall market conditions.

The Future

Recently, Gold bulls have been energetic once more, as US GDP contracted by 0.9% this quarter and 1.6% in the first quarter. It seems like the US has entered a ‘technical’ recession, even though some economists are still quibbling over the true definition of a recession. Accordingly, A-Mark has sold over 21 million ounces of silver, up 120% YoY, and over 500,000 ounces of gold, up 170% YoY, in the MRQ.

Source: Bloomberg

On the other hand, the Fed has been the center of attention for many analysts in the last week of July as the Fed chair raised interest rates by 75 bps for the second consecutive month. Suppose the dollar starts weakening again, the case for the commodities to see a more upward trend might get stronger.

Bullion markets have always been a safe haven for investors to hedge inflation amid economic uncertainties and right now, there is too much uncertainty in the market for risky investments. The precious metals market has a proven track record as a safe investment under these conditions and A-Mark stands to benefit from this scenario, especially as it likely appeals to a lot of the younger generation at a higher level than conventional investments.

Nevertheless, investors need to be aware that a recession impacts almost every industry in the market, and the statement “Past efficiency is not any assure of future outcomes,” seems more relevant than ever.

Conclusion

The company’s expansion in bullion exchanges and more emphasis on retailer investors indicate that AMRK is here to stay if it successfully caters to young investors. The new generation has been very receptive to innovations such as digital assets, NFTs, and cryptocurrencies.

The curiosity and resilience proven by millennials and Gen Z buyers by investing in risky investments which can be simple to entry and out there in fractional denominations might be a significant catalyst for AMRK to shift its focus to its new demographic.