Sturm, Ruger & Company: RGR Stock Is Still a Solid Long-Term Pick

Although there is some risk involved, RGR is still a good, longer-term stock to grab

Gun manufacturer Sturm, Ruger & Company (NYSE:RGR) fired a broadside against gun control advocates, reporting blowout numbers for Q2. Every time someone decides to make gun control an issue in the media, the gun makers see sales pop, as gun owners hedge their bets against Second Amendment restrictions.

RGR showed sales of $168 million, which translated to $1.22 per share, compared with $141 million and $0.91 per share last year. For the six months so far this year, RGR saw sales of $341 million and earnings of $2.44 per share.

That compares to sales of $278 million and earnings of $1.71 per share for RGR in the corresponding period in the previous year. For those keeping track, that’s a 34% increase in quarterly earnings-per-share, and 43% increase in EPS for RGR during the first half of 2016.

That’s on a respective increase of 19% and 26% in sales for RGR; roughly a third of these sales came on new products. Independent distributors and retailers continue to contribute mightily to the cause, with 20% sales increases year-over-year. That, in turn, was helped by a 15% increase in background checks.

RGR stock was thus helped by operational cash flow increases. During the first half of this year, $66 million of cash generated, giving RGR stock $103 million of cash on hand. About 40% of net income is paid as a dividend, as well amounting to about $16 million for the first six months. Best of all, Sturm Ruger has no debt.

What’s to Come for RGR Stock?

This is how it is sometimes with some stocks. Political events will have an effect. Whether it be Dodd-Frank creating the Consumer Financial Protection Bureau, which kills payday lending, or a budget sequester that curtails defense spending, or 2nd Amendment rhetoric, politics are a risk factor. In this case, however, politics actually benefit gun stocks.

If you look at earnings for RGR stock and Smith & Wesson Holding Corp (NASDAQ:SWHC), you’ll see a continuous increase for several quarters after the Newtown and Sandy Hook murders, which were followed by intense political rhetoric. Then things quieted down, and YOY sales declined, as did the stocks. Lately it has heated up again, as demagogues go after law enforcement for high-profile shootings.

This leads us back to the question of whether RGR stock, or even SWHC for that matter, can be purchased at their respective lofty levels. RGR stock is actually 15% off its all-time high. SWHC is right near its all-time high.

As I preach about long-term diversified portfolios, I think you can buy either stock for the long-term and not have much to worry about. Personally, I’d prefer to wait for a pullback. It seems more likely that we will see a broad market correction before either stock roars higher.

That being said, there is what I’d call the “Clinton Call Option”. Should Clinton win the Presidency, there is a likelihood she’ll nominate an anti-Second Amendment judge to the Supreme Court. This would trigger, so to speak, a mad rush on guns. As we get close to the election, you may literally want to purchase some call options on both stocks.

There would be a longer-term concern if sales would be impacted by a SCOTUS decision that curtails ownership, however, so be alert.

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

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