Take a Shot at Gun Stocks

Fear over gun control has been a boon to gun stocks.
Barack Obama and Michael Bloomberg are every gun stock owner’s dream salesmen. Gun sales were already doing well when the Newtown massacre occurred. By politicizing the tragedy into a referendum on gun control, Obama and the Democrats injected fear into the populace – that the government was coming for their guns.
This spurred sales into overdrive.   Some manufacturers had trouble meeting demand. Only recently has this surge receded, yet upside remains in gun stocks for the same reason.

Top Gun Stocks: Sturm, Ruger and Co.

Sturm, Ruger and Co. (RGR) is a 65-year-old manufacturer of all kinds of guns. A $15 stock in 2011, and it is now at $68. This gun stock had been seeing high double-digit surges in revenue and EPS growth over the past several quarters.
Here in Q1, the numbers have decidedly cooled. Net sales were $170 million compared to $155 million, or a 9% increase. EPS only lifted two cents to $1.22 per share. There is an important trend in RGR’s report to note.
Criminal background checks fell 22% YOY, although unit sales increased 10%. In other words, people who had been falling over themselves to get a background check have now slid back towards the mean, while current gun owners continue to make purchases. The “fear run” appears to be over.
This gun stock sits on a solid balance sheet, with $2.57 per share in cash and no long-term debt.
There is still the possibility of another “fear run”. Former NYC Mayor Michael Bloomberg is launching a $50 million gun control initiative. If it gets any traction, we may see that surge again. Otherwise, the mega-growth story appears to have waned.
The good news, however, is the company is committed to returning value to shareholders. RGR stock alters its dividend every quarter, usually paying out about 40% of net income to shareholders.   Right now, the 49 cent dividend represents a 3% yield.
However, RGR stock trades at 15x this year’s earnings. I think that may be pricey in the near-term considering the sales slowdown. Over the long term, guns remain a part of American culture, like oil and television. I think RGR stock is a long-term buy.
Smith & Wesson Holding Company (SWHC) seems to be experiencing a different situation than its rival. Although its stock has also risen considerably – some 80% over six years – it has always lagged in performance to RGR stock. It isn’t clear why.
SWHC is 150 years old, deals in many of the same products, and SWHC stock enjoyed the benefits of the fear surge. It may be that investors lost some faith in the company’s ability to keep up with demand although its earnings were very different from RGR’s.
SWHC stock beat estimates of 29 cents EPS by reporting 35 cents per share. That’s a 33% EPS increase, coming on a 7% sales increase. Smith & Wesson doesn’t pay a dividend. Instead, it prefers to repurchase stock.
It decreased shares outstanding by 19% last year. This is a fine strategy, although I don’t like that the company did so by taking on debt. I think it’s a value play with a long-term upside with the stock trading at only 10x this year’s earnings.
Lawrence Meyers does not own shares in any company mentioned.

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