Sturm Ruger & Company Inc (RGR) Stock Will Rebound After Strong Q1

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Investors didn’t expect much from Sturm Ruger & Company Inc (NYSE:RGR) earnings on Monday afternoon. But that didn’t mute the celebration late Monday, with RGR stock up more than 5% after the company reported a first-quarter beat on the top and bottom lines.

Sturm Ruger & Company Inc (RGR) Stock Will Rebound After Strong Q1

Expectations were so low, in fact, that RGR shares fell 4% during regular trading Monday — a decline joined by other gun stocks. American Outdoor Brands Corp (NASDAQ:AOBC) and Vista Outdoor Inc (NYSE:VSTO) declined 1.9% and 2.9%, respectively.

All three stocks — plus firearms-heavy retailer Sportsman’s Warehouse Holdings Inc (NASDAQ:SPWH) — have sold off since the election. Donald Trump’s surprise win implied looser firearms policies in the U.S. for at least the next four years – and limited a key driver of ‘urgent’ demand in the space.

The news has gotten better of late, however. NICS firearm background check data from the FBI shows improving trends. Monthly checks were down almost 20% in January, a figure that improved to -14% in February, -4% in March, and -4.7% in April. Gun stocks have bounced off their bottoms as a result.

RGR stock should do more bouncing after an impressive first quarter report Monday afternoon. While analysts were expecting a dismal report — with sales down 8% and EPS declining 15% — Sturm Ruger hung in just fine despite headwinds in the business.

Q1 earnings seem likely to boost RGR stock for one simple reason: If this is what a “tough” quarter for Sturm Ruger looks like, then shares are simply too cheap.

Good Q1 Numbers for Sturm Ruger

On their own, the Q1 numbers from Sturm Ruger might not look all that impressive. Revenue did decline about 3% year-over-year to $167.4 million, versus estimates of $159.35 million. EPS was flat at $1.21 per share, but a lower tax rate (35% vs 36%) and a lower share count (providing a 4% benefit) both helped, and that beat expectations for $1.03 per share. Operating income fell 6.5%, implying weaker margins year-over-year.

But in the context of the expectations for the quarter and the next few years, Q1 should set up at least a “relief rally” for RGR stock.

Unit sell-through for Sturm Ruger declined 7% — but background checks fell 11% in the quarter, implying market share gains. New product sales represented 25% of the quarter’s total.

The narrative surrounding Sturm Ruger heading into the report was that the company was facing potentially significant and multi-year problems on the demand side. As investor Bob Evans –no relation to Bob Evans Farms Inc (NASDAQ:BOBE) — put it on the Q4 conference call in February, “you’ve never had a better administration for the gun industry than Obama — and now never a worse one for the gun industry than Trump.” Inventory at distributors had spiked, as dealers ordered products ahead of an anticipated Clinton win.

This was supposed to be a tough year — not just a tough quarter — for gunmakers, Sturm Ruger included.

Strong Performance in a Tough Environment

Sturm Ruger earnings for one quarter don’t completely negate that case, of course. But they do mitigate it quite a bit.

In what should have been an ugly quarter, Sturm Ruger cut expenses (operating expense declined by over 4%) and kept margins relatively stable (EBIT margins fell about 70 bps year-over-year).

New product development kept sell-through and revenue levels up despite potential political pressure. Aggressive share repurchases boosted EPS, to be sure. But they were also executed at an average price below $50, while RGR has a good chance of jumping back past $60 in trading tomorrow.

The inventory and demand impacts of Trump’s surprise win aren’t over. But what earnings show investors is that the company can manage even in a tougher environment. And that should allow for more normalized trading going forward.

Changing the Narrative for RGR Stock

Sturm Ruger’s shares are cheap, trading at less than 15 times 2017 analyst earnings estimates heading into the report. Those estimates seem likely to rise: the Street was expecting a 14% full-year decline in EPS, which seems highly unlikely at the moment.

So there’s a potential double-barreled (pardon the pun) benefit for RGR stock.

Earnings expectations should rise, with EPS estimates moving toward $4.25 or so. Meanwhile, the odds of a doomsday scenario for Sturm Ruger — steadily falling demand over a multi-year period — seem far less likely. That in turn de-risks shares, and might allow for that earnings multiple to expand closer toward overall market levels.

Bearing in mind that RGR closed last week at exactly $60, a double-digit rise Tuesday seems reasonable. A 16x multiple on $4.25 in EPS gets the stock to $68 — an 18% gain. That might be optimistic — but it’s not wildly so.

With Sturm Ruger showing it can still succeed in a tough environment, investors seem likely to give the stock at least some of the credit it deserves.

 

As of this writing, Vince Martin was long SPWH.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/sturm-ruger-company-inc-rgr-stock-will-rebound-after-strong-q1/.

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