Gun Sales Spike Puts Pressure on Smith & Wesson, Ruger

by James Brumley | December 19, 2013 10:45 am

To say 2013 has been a good year for the firearm industry — as well for as investors of its key companies — would be an understatement.

Shares of Sturm, Ruger & Company (RGR[1]) are up 65% year-to-date, and that’s with the sizable pullback from November’s highs. Smith & Wesson Holding (SWHC[2]) has doled out a 57% reward for shareholders this year, with a big chunk of that coming in just the past few weeks. Those performances are far better than the market’s gain for the year.

Gun salesIt’s not like the gains from Smith & Wesson and Sturm, Ruger have been undeserved, either. SWHC pumped up its earnings to the tune of 16% last quarter, and income is up 60% for the past twelve months. The improvement was largely driven by handgun sales, which were up 27% in the previous quarter. Meanwhile, Ruger is on pace to post a profit of $5.59 per share this year, up 55% compared to 2012’s income of $3.60 per share.

There’s a flipside to the coin, however. Those who follow SWHC stock and RGR stock closely will know that red flags have started to wave recently. Specifically, privately-held Remington Outdoor warned that it saw a serious sales slowdown from 2013’s pace on the horizon for the coming year. And, last month’s pre-gun-purchase background checks were reported to be 10% lower[3] than the number of such checks performed in November of last year.

It’s certainly a mixed message. How should RGR and SWHC shareholders be rectifying them? This is one of the rare cases where the numbers aren’t nearly as important as what’s on the horizon of the legal and social (and pure saturation) landscape.

Gun Sales Fall as Fast as They Rise

It’s become cliche to the point of being cumbersome, but the future value of Sturm, Ruger & Company and Smith & Wesson Holding still hinges on the lingering possibility that the White House could, through legislation, crimp gun sales to the point of making the business unprofitable[4].

Indeed, the mere threat of such legislation in the post-Sandy Hook world was the reason gun sales perked up in late-2012, and then absolutely soared in 2013 when would-be gun buyers went ahead and pulled the trigger on firearm purchases. The spike in sales was a last-minute rush to own guns before a new law was widely presumed to become law.

Though the proposed Federal law never got any traction, it was undoubtedly a great sales driver at the beginning of the year. The problem: That sales spike created a tough act for gunmaker like SWHC and RGR to follow.

See, while there are always stragglers, anybody who wanted to buy a gun based on their fear of a lack of availability in the future has likely already purchased all the firearms they care to own. In other words, the next round of fear mustered by proposed gun-regulation laws isn’t likely to boost gun sales the way it did in 2013.

That sentiment is largely reflected in the earnings outlooks for the market’s two biggest gunmakers. Next year’s income per share of RGR stock is projected to fall from 2013 $5.59 to $4.20 per share. Earnings for SWHC stock are projected to fall by 6% over the course of the next four quarters.

It’s not apt to be your garden-variety case of sandbagging just so these companies can emerge from their earnings announcements looking like heroes, either; interest in gun purchases is falling fast[5]. Aside from the 10% year-over-year dip in November’s requests for gun-related background checks, sporting good retailer Cabela’s (CAB[6]) reported in October that ammunition and gun sales began to fall as early as August[7].

And, considering there are 88.8 guns in this country for every 100 people living in the United States[8] (an estimated 30% of U.S. households have at least one gun in them), it wouldn’t be out of line for investors to start asking if the market is saturated to the point where any growth in gun sales is going to be difficult to muster from here.

Bottom Line

To be clear, even though the pace of gun sales is apt to slow for the foreseeable future, it’s not as if Sturm, Ruger or Smith & Wesson won’t find some sort of market for its products for years to come. It’s a question of pace; 2012 and early 2013 was an unusually strong gun-buying period, largely for temporary political reasons.

The thing is, for current or prospective investors in SWHC stock or RGR stock, a weakening sales-growth pace is still likely to have the same detrimental effect as an outright dip in revenue or income. To investors, most things are relative.

Those seeking to capitalize on the now-waning firearm craze may be better off looking at ammunition makers[9] like Olin Corporation (OLN[10]). It got its own mania-driven sales bump in Q3, as owners of newly-purchased guns stocked up on bullets. But, at least there’s relatively stable recurring revenue in the ammo business, assuming all these recent gun buyers make occasional visits to the shooting range.

The gunmakers themselves are little more than a coin toss at this point.

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

  1. RGR:
  2. SWHC:
  3. were reported to be 10% lower:
  4. crimp gun sales to the point of making the business unprofitable:
  5. interest in gun purchases is falling fast:
  6. CAB:
  7. reported in October that ammunition and gun sales began to fall as early as August:
  8. there are 88.8 guns in this country for every 100 people living in the United States:
  9. better off looking at ammunition makers:
  10. OLN:

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