Shooting for Growth: Sturm, Ruger & Co.

George is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Overview

It's not every day that an iconic American company that has been around since 1949 is forced to stop taking orders until "the end of May" due to overwhelming demand. Sturm, Ruger & Co. (NYSE: RGR), the U.S. firearms company with a 974.4M market cap has done exactly that. Due to extremely positive Q1 sales of over 1M units, Sturm, Ruger & Co. has temporarily suspended acceptance of new orders because it cannot keep up with demand. The company, which operates in the consumer goods sector, is currently benefiting from a huge surge in interest of firearms. This huge surge in firearms interest has led Sturm, Ruger & Co. to continue its innovation and creation of new products. On April 12, 2012, Sturm, Ruger & Co. officially introduced a new product: the Ruger 22/45 Lite Pistol. Meanwhile, the stock price of Sturm, Ruger & Co. has been riding high, experiencing a 52.3% gain in its stock price YTD and hovering near its 52-week high of $53.29. 

The Niche

Sturm, Ruger & Co. is an attractive investment because it is an excellent play on the firearms industry, which has been experiencing unprecedented growth. This growth has been due to a confluence of factors that have combined to create an extremely unique investment opportunity for investors. Factors such as the proliferation of legality of conceal-carry permits in several states, continued economic uncertainty, and Supreme Court decisions on the interpretation of the Second Amendment have boosted sales. However, the primary factor for the growth in firearms demand is political in nature. The firearms industry has been booming off of fears of increased gun ownership restrictions instituted if President Obama is re-elected. In fact, the firearms industry, in the recent months, has been primarily a reflection of political sentiments that have often been polarized by rhetoric from not only politicians, but also from the National Rifle Association. NRA President Wayne LaPierre recently stated that the Obama administration's policies were "part of a massive Obama conspiracy to deceive voters and hide his true intentions to destroy the Second Amendment during his second term." Thus, many prospective gun owners/existing gun owners fear that if Obama is reelected, he will pursue more stringent firearms restrictions and regulations as a second-term president. 

This reaction to our presidential elections has not been unique; in fact, when Obama was elected in 2008, gun sales rose on similar sentiments. This 2012 presidential election is turning into a major catalyst for firearms demand because the campaigning and promises of presidential candidates are crucial indicators of presidential policies to come for the next four years. Although various firearm legislation will be passed and various legislative elections will impact the firearms industry, it will not see another similar political catalyst for years to come. Sturm, Ruger & Co. is aware of the importance of maintaining a strong presence in Washington D.C., and has recently partnered with the powerful National Rifle Association in implementing and promoting  the “1.2 Million Gun Challenge to Benefit the NRA.”  

The Result

Sturm & Ruger's fundamentals are what separate it from the rest of the pack. Its fundamental growth and stability leads the pack in the firearms industry, and it is the most healthy company in one of the most prospering sectors in the business world. Although I recommend Sturm & Ruger mainly as a sector play, its fundamental performance in-and-of-itself makes this stock and company extremely attractive.

Last quarter, Sturm, Ruger & Co. blew away analyst estimates as it reported an 80% EPS increase Year-Over-Year (YOY), a 45% increase in sales YOY, as well as a 17.4% earnings surprise. Moreover, Sturm, Ruger & Co. has experienced an impressive 64% average EPS growth for its last three quarters, its estimate revisions are up, and it is currently forecasting a 45% EPS increase YOY for the current quarter.

This growth has been by no means sporadic. Sturm, Ruger & Co. has been experiencing constant growth, which has recently been spurred on by the various aforementioned catalysts. Sturm, Ruger & Co. has a healthy 3-Year EPS Growth Rate of 39%, with an estimate of 22% annual earnings growth for this year. Moreover, it has experienced 4 consecutive years of annual EPS growth. Sturm, Ruger & Co. also has a 14% 3-Year Sales Growth Rate, which shows a constant and substantial demand for its products.

Going hand-in-hand with the company's strong earnings and sales figures is its profitability. Sturm, Ruger & Co. has an annual ROE of 31.8%, with an annual Pre-Tax Margin of 19.3%. It has an Operating Margin (ttm) of 19.19%, compared to the industry average of 2.31%;ever since Michael Fifer became CEO of Sturm, Ruger & Co. in late 2006, it has been continuously improving margins.

The Competition

Sturm, Ruger & Co.'s major competitor is Smith & Wesson (NASDAQ: SWHC). Although Smith & Wesson is poised to benefit directly from Sturm, Ruger & Co.'s temporary suspension of acceptance of new orders, it has some significant detriments. For one, Smith & Wesson recently had to spin off its perimeter security business because of a significant drop in demand due to reduced government and corporate spending. The impact from this spinoff in the long-term will allow Smith & Wesson to focus on its firearms business. However, in the short term, Smith & Wesson's bottom line may be adversely impacted; for its last fiscal year, Smith & Wesson's security business accounted for 13 percent of its revenues. Also, there are some red flags concerning Smith and Wesson's fundamental performance: it has a -24% 3-Year EPS Growth Rate on a low 3% 3-Year Sales Growth Rate. Profitability has also been paltry compared to that of Sturm, Ruger & Co.; Smith & Wesson currently has an annual ROE of 7.9% and an annual Pre-Tax Margin of 4.1%.

Sturm, Ruger & Co. has no debt and is currently modifying its manufacturing process to ensure it can adequately accommodate significant demand in the future. It is also focused on expanding its business, and is currently searching for potential acquisitions that "will move the needle," according to Michael Fifer.

The Overview

Overall, Sturm, Ruger & Co. is a very attractive investment that has strong fundamentals and is experiencing huge demand for its products. Although it may be somewhat negatively impacted by its temporary suspension of the acceptance of new orders, Sturm, Ruger & Co. has a strong case going for its future prosperity. It is an excellent play on the firearms industry and has strong enough financials and growth to ensure that, even in a case of satiation of demand for firearms, it will continue to grow and beat estimates. Sturm, Ruger & Co. became first firearms manufacturer to build and ship more than one million firearms in one year in 2012, and I expect it will sell millions more in the future.



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