Lock and Load (Up) on Gun Stocks

by Lawrence Meyers | July 5, 2012 7:00 am

Firearms sales are on fire again in the U.S., with most of the credit going to citizens stocking up now[1] on fears that the Second Amendment will become a target if President Obama is reelected. Then there’s always the desire to defend oneself against the threat of violence, particularly by extremist groups of whatever persuasion.

Naturally, this gets me thinking about what stocks might benefit from such a notable trend. The obvious choices are gun manufacturers. Looks like that’s been the way to go.

Smith & Wesson (NASDAQ:SWHC[2]) racked up record quarterly and yearly growth[3] in gun sales, up 28% and 20%, respectively. The company combined this performance with an 8.7% drop in quarterly costs and 4% annually. The result pushed much of these sales to the bottom line, with continuing operations income increasing from $5.8 million all the way to $25.6 million for the quarter, and tripling annual operating income to $39 million.

Plus, Smith & Wesson has $439 million in backlogged orders, it shipped a record number of units, generated $25 million in free cash, increased gross margins, paid down $30 million in debt and bought back $6 million worth of senior notes.

Clearly, this is all great news. Even better, S&W says it foresees a 50% increase in earnings this year to a range of 60 cents to 65 cents per share. The stock trades at about 14x earnings with analysts projecting 22% annualized growth going forward. That suggests it’s a value play at only $8.70 per share.

Sturm, Ruger & Co. (NYSE:RGR[4]) has an interesting problem. It’s receiving more orders than it can keep up with. So much so that it suspended taking new orders for two months this year. In its Q1, it saw a 33% increase in revenue on a 49% jump in unit sales, which drove a doubling of profit.

The company has a great balance sheet, with $96 million in cash and no debt. Sturm Ruger generated $21 million of free cash in the quarter, which will go toward capital spending for the year, leaving the other three quarters as pure cash flow gravy. Earnings are also expected to rise 50% this year. The stock trades at 16x earnings, suggesting it’s a value play.

These stocks are considered consumer discretionaries, so they might make a nice supplement if you hold the Consumer Discretionary Select Sector SPDR (NYSE:XLY[5]). That ETF is full of large-cap names like Target (NYSE:TGT[6]) and Nike (NYSE:NKE[7]), so small-cap gun manufacturers like these are a good way to add some diversification.

Will this trend continue? A Benchmark analyst says the firm sees “long-term, secular growth from the increasing social acceptance of firearms for both personal defense and recreation/leisure.” It seems to me that those who like guns have always liked guns and won’t stop liking guns. In addition, millions of potential converts are out there — and that gives the gun manufacturers a long way to go.

Now, if you’ll pardon me, it’s duck season[8]!

Lawrence Meyers does not own shares in any company mentioned and enjoys rabbit stew. He’s president of PDL Capital, Inc.[9], which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com[10]. He also has written two books[11] and blogs about public policy[12], journalistic integrity[13], popular culture[14] and world affairs[15].

Endnotes:
  1. citizens stocking up now: http://www.foxnews.com/us/2012/03/22/gun-sales-off-to-bang-for-election-year/
  2. SWHC: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWHC
  3. record quarterly and yearly growth: http://investorplace.com/2012/06/smith-wesson-2013-outlook-strong-shares-jump/
  4. RGR: http://studio-5.financialcontent.com/investplace/quote?Symbol=RGR
  5. XLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLY
  6. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  7. NKE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NKE
  8. it’s duck season: http://www.youtube.com/watch?v=DSTLmhWIYTs&feature=related
  9. PDL Capital, Inc.: http://www.pdlcapital.com/
  10. SeekingAlpha.com: http://seekingalpha.com/author/larry-meyers/articles
  11. written two books: http://investorplace.com/author/lawrence-meyers/
  12. public policy: http://biggovernment.com/author/lmeyers/
  13. journalistic integrity: http://bigjournalism.com/author/lmeyers/
  14. popular culture: http://bighollywood.breitbart.com/author/lmeyers/
  15. world affairs: http://bigpeace.com/author/lmeyers/

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