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If this works out, it will be one of the biggest breakthroughs in the history of the Czech arms factory

Jamie Cameron
10. 10. 2022
6 min read

Czech Armaments (Colt CZ Group) is undoubtedly one of our best companies to invest in. Moreover, reports have now begun to emerge that, if confirmed, would mean a huge leap and a worldwide boom for this arms giant.

The Czech arms company is, of course, primarily engaged in the production of weapons. Source.

It is a domestic firearms manufacturer with a history of more than 80 years. Its portfolio includes the world-famous CZ pistols and Bren rifles. The most important news from the recent past is of course their acquisition of the well-known Colt and renaming it Colt CZ Group $CZG.

How is Colt CZ Group doing?

The Czech arms company currently has a market capitalization of around 20 billion crowns. Thus, from a global perspective (under $1 billion), it is not a very large company. From the perspective of our country, however, it is a company on the highest rungs. We are also currently talking about a dividend yield of around 4.5% for this company, which is not bad at all. The P/E ratio of around 14.4 is not the lowest, but many experts agree that the fundamentals are strong enough to justify this price.

Colt CZ Group Fundamentals

In addition, the return on equity (i.e. the ratio of operating profit to equity) is relatively high at around 20% and is expected to reach 30% in the coming years.

Moreover, the armaments plant is still growing. In 2020, at the IPO, sales were CZK 7 billion, and this year it should be almost CZK 15 billion. In two years it will be 19 billion. The predicted average growth is 20% per year.

It is also often the case that young companies grow revenues rapidly, but shareholder value creation is almost negligible. Quite often, then, one sees negative EBITDA and FCF.

This is not the case here. EBITDA is positive and should grow, and is expected to be around CZK 4 billion in 2024.

Current analyst estimates directly from the armaments company's website. Source

Is there a big move coming?

Recently, mentions have started to appear on the internet (especially in Facebook groups) that the arms factory should be included in the Emerging Markets Index. Even after a long search, I have not been able to find out if this will actually happen. However, if the information is true, it would be quite possibly a solid injection into the vein of Colt CZ Group. After inclusion in the index, funds that copy the index would have to start buying shares (albeit on a pro rata basis).

As a rule of thumb, once a stock is included in the index, demand for it rises dramatically - and so does the share price - as institutional investors adjust the allocation of their portfolios. And as long as demand continues, the share price premium will increase .

But that's a big if and speculation. No official sources, including the company's own website, are talking about the listing.

No mention

Purchase of Colt CZ Group

The biggest recent move for the domestic gun maker is clearly their recent acquisition of the legendary Colt brand.

"This merger is a strategic move for both companies. The acquisition of the Colt brand, which is an icon and benchmark for military, law enforcement and commercial markets around the world, fits perfectly with our strategy to become a leader in the firearms industry and a key partner for the armed forces. We are proud to include the Colt brand, which has stood alongside the U.S. military for more than 175 years, in our portfolio. We believe in the successful blending of our corporate cultures, the proven track record of the current management team and the complementary nature of the CZ and Colt brands. The combined group will have revenues in excess of $500 million and represents a true force in small arms. The experience of the CZ and Colt management will further strengthen both brands and ensure that CZ and Colt continue to deliver superior products and solutions to all of our customers."

That was the statement from Lubomir Kovarik, President and Chairman of the Board of CZG. And their current status suggests that they could be successful.

https://www.youtube.com/watch?v=UQc3S8VPMCo

How did the company do last year?

The company made a total of CZK 10.861 billion in 2021, which is a nice 55.99% growth over 2020. The company made a gross profit of CZK 4.289 billion last year. The gross profit as well as the revenue is also growing regularly. On the other hand, the gross margin is declining due to rising costs. Anyway, the margin is still close to 40%, which is not bad. The company has been profitable for a long time, generating over 760 million last year, surpassing its best year so far in 2019.

The payout ratio over the past 12 months has been around 24%. This shows the company is retaining over three-quarters of the profits generated and is still able to pay a solid dividend. The dividend this year has been set at C25 per share.

Not everything is rosy

Lest things remain overly positive - as I mentioned - the company is particularly troubled by rising costs. Raw materials and, of course, lately also mainly energy.

Adding to the problems caused by the covid in the previous two years are rising electricity and gas prices, as well as more expensive materials and transport. "We have implemented a number of changes and measures to minimise these multi-costs, amounting to tens of millions of crowns. We are increasing the efficiency and productivity of our work, and we are investing heavily in new, more efficient technologies," Jan Zajíc, the head of Česká zbrojovka, told E15.

Despite this, the armaments factory seems to be one of the best options our market offers. What's your take on Colt CZ Group's stock and the potential big move for its shares?

Disclaimer: This is in no way an investment recommendation. It is purely my summary and analysis based on internet data and a few other analyses. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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