Earnings were dismal, but it may mean the bottom in in and value exist for gun stocks.
The greatest boon for gun stocks came, ironically, after the tragic school shooting in Newtown. After the news broke, both Sturm, Ruger & Co. (NASDAQ:RGR) and Smith & Wesson Holding Co. (NASDAQ:SWHC) lost a third of their value, as investors feared gun control legislation would severely harm the gunmakers’ profits.
Then a strange thing happened. Rather than stay down, the stock roared to life. All the talk of gun control in the news encouraged Americans to stock up on guns for fear their availability might be restricted.
RGR had been at $60 before the shooting, fell to $42, and then hit $84 – a 100% return off the bottom – in January of this year.
SWHC had been at $10.62, dropped to $7.79, and then hit $17.14 – a 120% return – in June of this year.
Then the rally faded as gun purchases reverted to the mean. Year-over-year comps have been miserable for both companies. It’s not that business is lousy, it’s just lousy compared to the gun-control-driven buying frenzy.
How lousy? Sturm, Ruger reported on Wednesday. EPS came in at 34 cents per share, a 76% decline from last year and missing estimates of $1.13. Ouch. Revenue was down $98 million. Firearms sales were down 41%, castings were down 87%, gross profit fell 24%, operating income was down 78%. The short interest on RGR is now 30%.
As far as RGR goes, one wonders if the bottom is near, as the stock is now trading at the same price as it was AFTER the Newtown tragedy. Think about this. The market is saying that not only is the company worth a third less than it was before the market spooked investors out of the stock, but it’s worth the same as it was worth two years ago.
Q3 2012 showed revenues of $118 million vs $98 million for this past quarter. Gross profit then was $42 million, and this quarter it was $24 million. Net income was $17.3 million in 2012. This year it was $6.7 million.
These numbers suggest the stock is at $42 for good reason. The stock is trading at about 10x estimates, but it suggests that may be still be somewhat pricey.
Over at SWHC, Q3 2012 net income was $17.7 million. However, in its latest quarter, the company still generated $14.6 million. That may explain why it is still near the level it traded at before the Newtown incident. SWHC has reduced its share count by 22% since it began a $30 million buyback, so it is replacing RGR’s 3.5% yield with share count reduction.
But with SWHC, the CEO is expressing faith in the stock price, having purchased 10,000 shares at $10.02.
There was a school shooting in Seattle late last week. While a couple of media outlets made noise, the story has not caught a lot of traction, so a gun-control fueled purchase bump doesn’t seem likely.
I told you a few months ago not to buy RGR but to buy into SWHC. I reiterate by those recommendations today.
In comparing the two companies, I think RGR may have a little more downside, at which point buying for the next frenzy may make sense.
I would buy SWHC here. It’s holding its own, the CEO purchase is a very good sign, and the stock is good for $2-3 in trading at least, and possibly more if things pick up.
Lawrence Meyers is long SWHC.
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