Is there Money to be Made in Weapons?
Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Whether you like it or not, gun sales are at an all-time high in the United States and they are continuing to grow. Ammo is flying off of store shelves too; the companies that are making it are having a hard time keeping up. As an investor, think about buying into these trends. They show no sign of stopping and the government is going to ban guns outright -- but even if they do, this article may still have a stock for you.
Investing in guns
If you want to invest in guns, there are a variety of ways to go about it. The first is to buy gun manufacturers. There are two great pure play stocks for buying guns, and they will be the focus of this article. The two stocks we have are Sturm, Ruger & Co. (NYSE: RGR) and Smith & Wesson (NASDAQ: SWHC). Both of these companies have been making guns for decades and they are the best in the world at it.
Whether it is a shotgun, a pistol, a revolver, or a semi-automatic weapon, these companies have it and they’re selling plenty of them every single day.
Let’s start by looking at the larger of the two companies, Ruger. Ruger is worth just over $1 billion. They have a higher range P/E of 17.97 and they pay a solid dividend that yields 2.65%. With the exceptional growth that these companies have been experiencing recently, they have some incredible PEG ratios. The PEG ratio at Ruger is a very low 0.24. The company also has some $105 million in cash and no debt. Their profit margin is right around 14% on net income of $61 million and free cash flow is around the $40 million mark.
Remember that dividend yield a few lines up? That comes from a 34% payout ratio! Even the payout ratio at Ruger isn’t high, what could be wrong with this stock? Well, there are those potential bans, but even if they come I still believe that Ruger will continue to sell guns of some type and they’ll continue to be profitable.
Smith & Wesson are much of the same, they make the same style of guns and they sell them to the same customers in the same stores. The company is worth some $650 million and their P/E ratio is 11. When it comes to cash, Smith & Wesson has a hefty amount, as compared to market cap, at $58 million. That cash hoard is more than enough to handle their $43 million in debt, should they choose to pay it off, or go through a rough patch.
While Smith & Wesson does make more than Ruger when it comes to revenues, $57 million more at $500 million, it has an 11% net margin compared to Ruger's 14%.
Investing in ammunition is as simple as investing in guns. There are many manufacturers of ammunition out there but the one name that I always associate with when it comes to firing off shotguns is Winchester. Winchester is a brand owned by Olin (NYSE: OLN). The company is diversified enough that even a complete ban on guns wouldn’t mean the end of your investment.
With Olin, you’ll be getting a $1.8 billion company with a 12.45 P/E ratio that pays a 3.48% dividend yield. There is a little word of warning about this company though, it comes with quite a hefty chunk of debt at $700 million. The cash on hand is $165 million, which isn’t enough to cover debt, should they run into any severe difficulties.
No guns, no ammo
Don’t want to be in the gun game and ammo isn’t quite enough to pique your interests? How about Taser International (NASDAQ: TASR)? That’s right, the company behind the Taser brand! Taser has a market cap right under $4 million and it could become a hot seller if gun control becomes stricter in the future.
With a P/E ratio of 26.7, Taser is a little pricy. I do however believe that their sales will pick up as Congress continues to debate gun control. Taser is one of those unique brands where the trademark becomes the name of the whole category; can you afford to pass that up?
Both of the two gun makers are profitable, but they are likely coming into what will be some turbulent years. Ruger is a little more profitable than Smith & Wesson, so I would definitely choose that one if I were to look further into the two companies.
When it comes to ammunition, Olin is priced pretty cheap as compared to the overall market but the balance sheet doesn’t make me want to run out and buy up all I can. I’d definitely stay away from this for a while, unless you think surging ammunition sales and costs could bring some much needed boosts to the company.
Taser is an interesting play on the entire weapons game. It is a very powerful brand and definitely has lots of room to grow, so I think you should consider looking into it.
Ash1402 has no position in any stocks mentioned. The Motley Fool owns shares of Sturm, Ruger & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!