I had a chance yesterday to catch up with friend who told me an interesting story that demonstrates what happens when a company is riding powerful social and demographic trends. He and his wife decided to go shopping for a new handgun and headed out to do some comparison shopping. They found the stores packed to the point that several had employed the old New York deli counter “take a number” system to handle the crowds.
As the national discussion on gun control has ramped up in the past couple of years, consumers have bought handguns, shotguns and rifles in record numbers. A fear of political restrictions on the ability to purchase and own various types of guns has sent demand spiraling higher. At several stores my friend noticed half-empty cabinets as certain models were out of stock. Many manufacturers are no long taking specific orders and just shipping on an “as available” basis. Ammunition is also in very short supply. My friend was shocked at the demographics of the prospective gun buyers — mainly younger individuals and couples, hardly the convenient image of the stereotypical “gun nut.”
As you might imagine, this type of demand has been tremendous for the gun manufacturers. Market leader Sturm Ruger (NYSE:RGR) has seen earnings and stock price soar over the past few years. As impressive as the five-year growth rate for sales and earnings has been at 25% and 57%, respectively, growth has exploded even higher in the past year. In the last quarter the company reported earnings that were 88% higher than the previous year with 52% sales growth. There is no sign of the train slowing anytime soon either, as demand remains strong and analysts are scrambling to raise their estimates and opinion on the stock.
The picture is similar at Smith & Wesson (NASDAQ:SWHC). The company is setting sales records and earnings are rocketing higher. Management reported that plants have been running at full capacity for the past year and the company is still unable to meet demand. Analysts expect to see 30% annual earnings growth over the next five years as demand is expected to stay strong. Earnings for 2013 are expected to be better than double last year’s level, and analysts have been steadily raising the estimates as demand shows no sign of weakening.
Demand for handguns, rifles and shotguns is strong, and it shows no signs of abating anytime soon. The debate about gun control will continue for years, but right now many consumers are voting with their cash. Investors should consider doing the same and snap up shares of the fast-growing gun manufacturers.