U.S. Army On The Hunt For A New Rifle: Potential Winners

Includes: AOBC, OA, OLN, RGR
by: Kevin Mackie


The Army wants an upgrade from the M16.

Several companies have key products that may result in a contract.

May be too early to make any bets, but watch for developments.

An initiative to find a better rifle and/or accompanying munitions has been resurrected by the US Army. There was a battery of tests conducted from 2011 to 2013 to find an improved weapon system whose performance out-scaled the M16/M4 but the initiative was abandoned because none of the tested replacement rifles/ammunition showed significant enough of an improvement above that current platform. Another study was started in 2014 and will wrap up in the next couple months that researched further the direction the army should go with their small arms capabilities. Today I will discuss what implications this renewed hunt may have for publicly traded firearm-defense-munitions companies that could be contracted to research, develop, design, and manufacture the new weapon/ammunition, or which companies might be contracted because they already manufacture what the military is looking for. Any contract would potentially be worth hundreds of millions of dollars and could send the lucky stock soaring. Timelines stated by army personnel site 2020 as the hopeful date to have a working prototype.

First, a brief backdrop of why the army is looking for something new is important to provide context. The M16 platform has been used pervasively by the US Army since it's introduction in 1964 where it saw heavy use in Vietnam. It has gone through several adaptations and improvements since that time and now the M4 is the most commonly used weapon for soldiers. In engagements with the enemy the M4 is being outperformed mostly due to poorer range. Our army is being outreached by our adversaries weapons. While the M4 using 5.56mm NATO ammunition has an effective point range of about 500 meters, the PK machine gun with a 7.62X54R cartridge used pervasively by the Taliban and ISIS has a range of 800-1000 meters. Imagine being in a street fight with a guy who has longer arms. Other problems with the M4 and the 5.56 round include ineffectiveness due to enemies improved body armor and too frequent malfunctions (especially in dusty/dirty environments). So leaders are looking at different options to better equip our infantry, something that will shoot reliably, going farther and hitting harder. They need a round that can outperform the 5.56mm without giving up magazine capacity or adding too much weight. Something in the 6.5-7mm range is what the army is looking for.

One possible solution consists of finding a round or rifle already in production that can bring more firepower to the squad. The other option is designing a new weapon or round that is tailored to the specific needs of war-fighters. Following are the candidates being tested and the companies who produce them, or companies that could be contracted to build something new. Note: For the purposes of posting on this site, I of course left off the list any companies that are not publicly traded.

An easy and short term solution is to simply use already owned government weapons and upgrading them to be chambered for the 7.62 NATO round which hits harder and has better range. The drawback to this is that the 7.62 round is much heavier, thereby limiting the maneuverability of the soldier and/or reducing magazine capacity. Thusly, this is a short term solution. If the army does choose this route, the obvious winner in is Orbital ATK (NYSE: OA) who has been supplying small arms ammunition for the US Army for some time, and would in all likelihood be asked to supply them in the future, especially on the heels of a recent $53 million contract for large caliber ammunition. Being contracted with the military has been a huge boon for this stock and with Trumps defense heavy agenda, OA will continue to be a winner. Watch for the potential switch to 7.62 NATO and OA being asked to supply it.

Reports from ArmyTimes say that there are existing calibers in the intermediate range between the 5.56 and 7.62 that are being tested by army personnel to include the .260 Remington, .264 USA, and the 6.5 Creedmoor. American Outdoor Brands Company (NYSE: AOBC), under it's subsidiary Smith & Wesson, has a beautiful weapon called the M&P 10 that fires the 6.5 Creedmoor rounds. The Creedmoor round has been described as ''boringly accurate'' at 1000 yards, precisely what the military is looking for to overcome being outreached on the battlefield. Couple that deadly range with the fact that the Creedmoor is a bigger bullet and the recipe is right. The drawback here is that these rounds are considerably heavier which will increase carrying weight and/or reduce magazine capacity. The other drawback is that these weapons would potentially cost more than the going rate for the M4, and other weapon candidates were scrapped due to cost like the SCAR that some Rangers recently used for a short time. The other minor thing that could help the case for the M&P 10 is Trumps 'buy American, hire American' agenda. Smith and Wesson is about as American as you can get. I wrote an article some months ago about American Outdoor Brands Co. (formerly Smith & Wesson) as a company overview that you can read here. AOBC recently bounced off a bottom support level on their stock price and, given a 52 week high of ~ $30 as early as last year, is trading at a pretty attractive level at ~ $22. The depression in price is due to Trumps inauguration and, therefore, less urgency over gun control, on top of an industry that is historically cyclical. I strongly recommend AOBC. Had you bought AOBC on the day my article was published you would have a 19% return. Keep an eye on this one as the military may get bids from AOBC for the M&P 10 as it fires a round they have already expressed interest in. Naturally the R&D team at AOBC would be called upon to give the M&P 10 some battle ready modifications, but given that teams track reading of spurning out innovation every year, you bet they would be up to the challenge. The final thing to keep in mind is that Crimson Trace, a world lead in laser optics, is also owned by AOBC. Their team could outfit the M&P 10 with optics tailor made for the weapon that would give soldiers the upper hand in all battle conditions.

AOBC along with Sturm, Ruger and Company (NYSE: RGR) could theoretically be drafted to go to the drawing board and come up with something brand new for the army to use. There are plenty of other companies that could be asked to do the same but for obvious reason I am only including publicly traded companies in this report.

The other potential winner worth mentioned is Olin (NYSE: OLN) corporation. Though primarily a chemical company, Olin does own Winchester ammunition. Winchester was recently selected to be the sole ammunition supplier for the Sig Sauer handgun recently selected to be the armies new side-arm. With this contract (and many previous army deals), Winchester is certainly on the short list to potentially supply new ammunition for whatever weapon system is selected as the armies new rifle. Since sales from Winchester comprise only 12% of Olin companies revenue a contract with the army even worth millions wouldn't do much to move the needle. Nonetheless, it's worth keeping eyes on the stock as the contract would obviously still be a big plus.

I wouldn't start placing bets on any one of these companies just yet based alone on the potential of a contract with the army. Nonetheless it is important to be aware of the situation and any future developments along these lines. Keep a weather eye on the news and be ready to move quick.

Disclosure: I am/we are long AOBC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.