When people say an industry is hitting the bull’s-eye, they mean it as a metaphor. But when it comes to the gun industry, that metaphor is much closer to being literally true.
In fact, the two publicly traded stocks in the firearms space — Sturm, Ruger & Co. (NYSE:RGR) and Smith & Wesson Holding Corp. (NASDAQ:SWHC) — are hitting the fiscal bull’s-eye with the consistency and accuracy of a SEAL Team Six operator, and the latest news shows yet another confirmed kill for the sector.
On Thursday, Smith & Wesson blew away Wall Street expectations with a better-than-expected fiscal first-quarter profit of $17.8 million, or 27 cents a share, compared with $791,000, or a penny per share, just a year earlier. On an adjusted basis, the company earned 28 cents a share, which was way above consensus estimates for adjusted EPS of 18 cents.
Perhaps more importantly, Smith & Wesson added more firepower to its full-year forecast. The gun maker now says EPS for the year will be 85 to 90 cents on sales of $530 million to $540 million. That guidance also exceed estimates, in this case EPS of 63 cents on sales of $498.2 million.
In a statement accompanying the earnings, CEO James Debney made what I thought was a humorous, though I’m sure unintended, pun about the company’s report (emphasis mine):
“Internal capacity increases, enhanced supply chain integration capabilities, and strong execution by our operations team allowed us to exceed our revenue and earnings guidance by capturing incremental sales.”
Investors responded to the report by bidding up shares 16% midway through Friday’s trade. That gain is truly impressive, especially when you consider that before today’s surge, the stock was up more than 130% year-to-date.
Of course, Smith & Wesson isn’t the only firearm stock whose fiscal barrel is smoking.
Sturm, Ruger & Co., makers of the Ruger brand pistols, rifles and shotguns, also has delivered a kill shot when it comes to earnings. In August, the company reported better-than-expected quarterly numbers, as it saw increasing demand for its new rifle and pistol models. In Q2, the gun maker reported profits that rose to $18 million, or 91 cents per share, up from $10.8 million, or 56 cents per share, in the same quarter a year ago. Revenue rose some 50% to $119.6 million. Both metrics easily shot past the consensus views for EPS of 80 cents per share on revenue of $107 million.
RGR shares are up about 40% year-to-date, and they are up nearly 130% since April 2011, when I wrote that investors should buy RGR and pull the trigger on Smith & Wesson.
Interestingly, both Smith & Wesson and Sturm, Ruger shares were downgraded last month by KeyBanc Capital Markets analyst Scott Hamann. In a note to clients, Hamann said, “We believe the firearms industry is rapidly approaching levels of potentially peak profitability and could be at risk to some decline in these metrics if overall sales were to moderate.”
This analysis of the industry ultimately might turn out to be true; however, judging by what Smith & Wesson just reported — and going by its upgraded forecast — it seems like the industry has a lot more ammunition left to propel shares higher.
The upcoming presidential election is one reason why gun buyers have moved to arm themselves in greater numbers of late. Although gun policy hasn’t played a major role in the current debate between Republicans and Democrats, intense Second Amendment advocates always are fearful of a curbing of gun rights. Traditionally, this has been the province of Democrats, so if President Obama keeps his job for another four years, there is a fear that access to firearms will be restricted.
As a former soldier, and member of the special operations community, I’m probably a little biased in my perspective here regarding the firearms industry. Yet I also suspect that my background allows me to understand the devotion enthusiasts have for their guns.
That devotion should not be discounted in the Smith & Wesson and Sturm, Ruger investment thesis, and it’s partially the reason why sales — and both stocks — keep hitting the bull’s-eye.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities. He does, however, own a Smith & Wesson SW1911 with a tactical accessories rail.