Is Sturm, Ruger a Buy?
The gunmaker is in the midst of an unprecedented boom, but it also faces new challenges.
Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time. Having made the streets safe for Truth, Justice, and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. His coverage reflects his passion for motorcycles, booze, and guns (though not enjoyed all at the same time...usually), but his writing also covers the broader sectors of consumer goods, technology, and industrials. So follow along as he tries to break down complex topics to make them more understandable and useful to the average investor. Have a story idea? Contact Rich here. I may not be able to respond to every suggestion, but I do read them all! Think an article needs a correction? Reach Rich here.
The executive actions recently issued by President Joe Biden highlight just a few of the challenges facing the firearms industry with the current administration, as well as with a Congress willing to reflect its majority control.
In a period where the potential for legislation restricting firearms ownership is heightened, investors need to consider whether gunmakers like Sturm, Ruger(NYSE:RGR) are a buy.
Image source: Sturm, Ruger.
A surging market
Americans continue to purchase firearms at an unprecedented rate. Criminal background checks conducted on potential gun buyers by the FBI through its National Criminal Instant Background Checks System (NICS) are up 49% year over year through the first three months of 2021.
That follows a blowout 2020 that set an all-time record with almost 40 million background checks recorded. Even with the National Shooting Sports Foundation (NSSF) adjusting the raw FBI data to eliminate duplicates and investigations tied to concealed carry permits, it was still a massive number.
More than 21 million checks were performed last year, based on the adjusted count, 60% more than 2019 and 34% more than 2016, the previous record year. Perhaps more important, around 40% of the gun buyers last year were people who purchased their first firearm, according to estimates from the NSSF.
Data source: FBI. Chart by author.
Ruger reported sales were up 39% in 2020 to $569 million with growth accelerating in the fourth quarter as the top line increased 61% year over year. The gunmaker doesn't sell firearms directly to the public, only to federally licensed dealers and retailers. Sell-through of Ruger's firearms from its independent distributors to retailers increased 44% from 2019, showing just how much its firearms are in demand as retailers struggle to keep them in stock.
CEO Chris Killoy said in a recent press release, "[A]s a result of the unprecedented demand in 2020, inventories remain depleted throughout the channel, so inventory replenishment provides further opportunity" for growth and expansion.
Net profits at Ruger also nearly tripled last year to over $90 million, the highest level it has recorded since 2013. The company was able to raise prices last year, sell more expensive products, and reduce its promotional offers, all of which contributed to the top-notch performance.
The market's off target
It's clear Ruger and other firearms manufacturers are benefiting from the unique circumstances surrounding the industry, but this strength is not reflected in the stock price.
Sturm, Ruger stock trades at under 14 times trailing earnings, while rival Smith & Wesson Brands(NASDAQ:SWBI) sports a P/E ratio of just 10. And though the former's shares are up 29% over the past year (Smith & Wesson has gained almost 160%), it lags well behind the 51% gain of the S&P 500. Year to date, both gunmakers lag the broad market and are well off their 52-week highs.
Investors may be taking a bearish view in light of the political risks they face. For example, Biden is calling for changes to legal protections for the firearms industry, in addition to potential bans of modern sporting rifles (MSRs), one of the most popular categories of rifles in the country. The Ruger AR-556, for example, has been a top seller for the company, along with new variants that continue to drive growth -- new products made up 22% of Ruger's total firearms sales last year.
Does all that make Sturm, Ruger a buy? Yes, it does.
Here's an industry facing unprecedented demand, and Ruger happens to be a leading name in the market with a bargain valuation. The uncertainty created by any current political pressure only presents an opportunity for long-term investors.
While Smith & Wesson Brands is the more attractively priced stock, Sturm, Ruger still presents a compelling value as a growth stock, and owning both publicly-traded gun companies, who also happen to be the biggest manufacturers in the industry, is its own solid approach.
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Sturm Ruger & Company Inc RGR:NYSE
- Day High79.74
- Day Low79.08
- Prev Close79.29
- 52 Week High92.49
- 52 Week High Date07/01/21
- 52 Week Low58.70
- 52 Week Low Date11/24/20
- Market Cap1.393B
- Shares Out17.60M
- 10 Day Average Volume0.07M
- Dividend Yield3.95%
- YTD % Change21.75
- EPS (TTM)7.82
- P/E (TTM)10.12
- Fwd P/E (NTM)10.03
- EBITDA (TTM)214.482M
- ROE (TTM)44.09%
- Revenue (TTM)699.41M
- Gross Margin (TTM)38.13%
- Net Margin (TTM)19.88%
- Debt To Equity (MRQ)0.00%
- Earnings Date11/03/2021
- Ex Div Date08/13/2021
- Div Amount1.00
- Split Date-
- Split Factor-
There is no recent news for this security.
There is no recent news for this security.
Sturm Ruger & Co IncShs Stock , RGR
Sturm, Ruger & Co. , Inc. engages in the design, manufacture, and sale of firearms to domestic customers. It operates through the Firearms and Castings segments. The Firearms segment manufactures and sells rifles, pistols, and revolvers principally to a number of federally-licensed, independent wholesale distributors primarily located in the United States. The Castings segment manufactures and sells steel investment castings and metal injection molding parts. The company was founded by William B. Ruger in 1949 and is headquartered in Southport, CT.
Moody’s Daily Credit Risk Score is a 1-10 score of a company’s credit risk, based on an analysis of the firm’s balance sheet and inputs from the stock market. The score provides a forward-looking, one-year measure of credit risk, allowing investors to make better decisions and streamline their work ow. Updated daily, it takes into account day-to-day movements in market value compared to a company’s liability structure.
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Shareholder percentage totals can add to more than 100% because some holders are included in the free float.
Is Sturm, Ruger Stock a Buy?
Even though Sturm, Ruger(NYSE:RGR) has been going great guns this year, the firearms maker's stock is down 25% from the all-time high it hit back in August.
Although sales were up 53% in the third quarter compared with last year, profits soared fivefold, and management says demand shows no sign of letting up, the stock market has been keeping shares between $60 and $70 a share for the past three months.
Is there something brewing that wouldn't make Ruger's stock a buy? Let's take a closer look.
Image source: Getty Images.
A wave of new gun owners
2020 has been a good year for Ruger's fundamental business. The National Shooting Sports Foundation notes that an estimated 7.7 million people bought their first gun this year, one in which over 19.1 million background checks on potential gun buyers were conducted.
The record-breaking demand for guns has created a simultaneous spike in ammunition sales -- and a massive shortage -- leading Vista Outdoor's (NYSE:VSTO) president of ammunition to take to YouTube to plead for consumer understanding that his company is working overtime to produce as much ammo as it can.
Ruger sells only to federally licensed firearms dealers and retailers, and its distributors report that inventories remain depleted.
Is another gun control push on the way?
Those strong sales could continue well into 2021 and beyond. President-elect Joe Biden talked tough about gun control during his presidential campaign. He's called for enacting universal background checks on gun buyers, prohibiting online sales of firearms, banning certain types of semiautomatic rifles, launching mandatory gun buybacks, and repealing the legal protections that shield gun manufacturers from those who use firearms to commit crimes.
Those are all hot-button issues for gun owners and enthusiasts who fear further encroachment on the right to own firearms. It was those sort of talking points during the Biden's time as vice president that fueled what was then the greatest spike in sales and earned former President Barack Obama the moniker of world's greatest gun salesman, even though no legislation ever came of it.
Such talk in a Biden administration will undoubtedly keep tensions with the gun community running high, generating more sales for Ruger, industry peer Smith & Wesson Brands(NASDAQ:SWBI), and other gun manufacturers.
Higher sales will naturally lead to higher profits for Ruger, and that also means Ruger's dividend payment should continue to rise.
Unlike many companies that pay a set dividend to investors every quarter, Ruger's payout is tied to its net income, with management currently targeting roughly 40% of profits. Thus, as the gunmaker's earnings rise, so will the dividend.
Its $0.56-per-share dividend in the third quarter was about four times greater than the $0.14 per share it paid to investors in the same period last year. It was 33% higher than the dividend it paid just three months prior in 2020's second quarter.
Ruger also issued a special dividend of $5 per share to investors in the second quarter, to share with them the success it's been enjoying.
The price is right
Even though Sturm, Ruger's stock is up 45% year to date and 77% above the low point it hit back in March, it still trades at significant discounts.
Shares go for just 17 times trailing earnings and 15 times next year's estimates, but they trade at a bargain-basement rate of 10 times the cash flow it produces.
There's little reason for the gunmaker's stock to be so low, not with all the catalysts for growth building up behind it like a tsunami ready to crest. Investors looking for a great business to buy at a cheap price won't go wrong with Ruger.
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