A-Mark precious metals is a company that makes and sells physical gold and silver bullion. They own DTC brands like JM Bullion but also have a stake in Sunshine Mint and SilverTowne.
A-Mark has high revenue (~$2 billion/quarter) but very low margins due to the competitive industry. Historically, A-Mark’s profit margins have been much higher in periods of increased demand for physical precious metals and decreased supply. The COVID era saw severe supply chain constraints at both sovereign and private mints. Coupled with the “silver short squeeze” demand surge, A-Mark’s gross profit margins exploded in the first quarter of calendar year 2021 from 1.79% to 3.33% of revenue year-over-year while quarterly adjusted earnings reached a record high of $4.42 per share.
The problem is that since the bank failures of 2023 reignited demand, spreads have been declining across the board for A-Mark's core products. To track this, I compiled data from the trading desk of Upstate Coin & Gold, one of A-Mark’s competitors in the space of wholesale precious metals distribution and trading. Here is what I found:
While the daily quotes from Upstate should not be viewed as a perfect representation of the physical precious metals spreads for which A-Mark is a price taker, in aggregate they do provide a good overall view of the relative supply and demand forces governing the wholesale bullion market.
Perhaps A-Mark’s recent share price surge is the result of some investors’ beliefs that increasing gold and silver spot prices will lead to increased physical demand and widened spreads. Oftentimes, the opposite is the case. Among physical investors, higher prices can lead to pauses in buying or even selling, adding supply to the market and reducing the spread between spot and physical. Therefore, A-Mark’s margins may be hurt by increasing spot prices, not helped. The risk lies in the current quarter, CY Q2 2024 (FY Q4 2024 for A-Mark). Volume may increase, but will physical precious metals spreads remain at April levels throughout the rest of the quarter? If that was the case, significant downward revisions may be in order for analyst EPS estimates due to continued low gross margins. A-Mark's true “baseline” for EPS in a slow physical bullion environment could be much lower than this past quarter's results.
This may be the reason why short sellers have recently piled into the stock, with over 1 million additional shares shorted between March 29th and April 15th, 2024. No doubt the forthcoming earnings release will hinge on management’s outlook for future quarters, but spreads are seeming to continue to remain low thus far in CY Q2, leading to low EPS even if sales tick upward. At such a lofty price of over $40 per share, insiders may be tempted to sell their positions given recent historical insider sales at prices averaging $26.06, $26.29, and $25.49 earlier this year. Earnings are next Tuesday after close.
What are your thoughts on this? Is AMRK a quality short?
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