Gun Stocks’ Ammo Isn’t Spent Yet

by Jim Woods | June 27, 2013 1:50 pm

Gun Stocks’ Ammo Isn’t Spent Yet

Guns are hotter than ever, and that’s a development that makes me happy both politically and financially.

As a Second Amendment advocate and shooting-sport enthusiast, I think just about every American should own — and know how to properly use — a firearm.

As an investor and watcher of companies, the embrace of guns in recent years represents a wealth building opportunity that still has plenty of firepower.

On Tuesday, we found out just how on-target leading gun maker Smith & Wesson Holding (SWHC[1]) has been. The company reported stellar fiscal fourth-quarter earnings that included a doubling of net income to $25.2 million year-over-year[2]. The record-setting numbers came amid surging demand for the company’s handguns and rifles — demand that translated into $178.7 million in revenue for the quarter ended April 30.

Interestingly, Smith & Wesson said sales were actually held down by the fact that they couldn’t keep up with incoming orders. Now that’s a problem every company wants to have.

During the standout fiscal year, S&W said it logged a profit of $78.7 million — a metric that was 388% better than last year’s $16.1 million profit. Annual sales were $587.5 million, or an increase of nearly 43% over the prior year. This outstanding top- and bottom-line performance has helped SWHC shares extend a nearly 40% run during the past 12 months.

Of course, when it comes to guns, we are dealing with demand that’s fueled in large part by political fears over federal government restriction on gun ownership. So the big question that begs to be asked is: If that fear subsides, will gun stocks keep hitting the bull’s-eye?

This is the question on the minds of many gun-stock watchers, including yours truly. Some traders I’ve spoken with think the failure of Congress to come even remotely close to passing any form of federal gun legislation in the wake of the Sandy Hook tragedy shows that the fear bid fueling gun stocks will soon be factored out of the equation.

While this certainly could be the case, I think this theory fails to take into account recent historical trends, and the country’s new mind-set.

First off, robust customer demand for guns isn’t a phenomenon that has taken place since the Sandy Hook tragedy ginned up calls for gun control legislation. Indeed, ever since President Obama took office more than four years ago, demand for guns has been enormous.

That demand has fueled the bottom line not only at Smith & Wesson, but also at rival Sturm, Ruger & Co (RGR[3]). In April, Ruger reported a stellar 53% increase in net income during its first quarter — a gain that came as a result of a 39% jump in revenue to $155.9 million. That’s a whole lot of guns sold in just three months, and that strong demand shows the fundamental bid still present in the sector.

It is my opinion (albeit biased due to my pro-gun affiliations) that we have seen a permanent change in the mind-set of a significant segment of America — a mind-set that I think includes justifiable fears of more federal control over our lives in general, and more control over our guns in particular. There’s also an increased awareness among many of the importance of exercising their Second Amendment rights.

Perhaps more notably, Americans increasingly seem to be convinced that gun ownership is just the smart thing to do.

In a recent survey of first-time firearms buyers[4] conducted by the National Shooting Sports Foundation, owning a gun for home defense purposes (87%) was cited as the No. 1 reason why a new gun-buyer makes his or her purchase. Personal protection was the second-most-cited reason (77%). The survey did show that older first-time buyers — those in the 55 to 65 age group — cited concerns that firearms might no longer be available to them as one of the reasons for their purchase. Still, the overwhelming numbers of new gun owners say they aren’t buying because of politics, but rather out of safety and protection concerns.

The bottom line here is that even if the gun control push in Congress is over for now, the buying public still is convinced that guns are a good thing to own. It is this wise realization that I think will keep both S&W and Ruger growing — and that growth is likely to keep gun stocks among investors’ cherished holdings.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Endnotes:
  1. SWHC: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWHC
  2. doubling of net income to $25.2 million year-over-year: http://www.washingtontimes.com/news/2013/jun/26/smith-wesson-gun-maker-doubles-earnings-over-past-/
  3. RGR: http://studio-5.financialcontent.com/investplace/quote?Symbol=RGR
  4. a recent survey of first-time firearms buyers: http://nssf.org/NewsRoom/releases/show.cfm?PR=062413_FirstTimeBuyers.cfm&path=2013

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