Gun Bans: Good for Sales?

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

Gun bans seem to be good for gun sales, as evident in the results of two of the biggest gun manufacturers that just came out. As those who support the 2nd Amendment fear politicians trying to limit their rights, they go out and buy guns ahead of a potential ban. Even the threat of a ban, as is the case this time, significantly boosts sales.

Sturm up those sales

Sturm Ruger & Co (NYSE: RGR) posted earnings that beat estimates, with revenue coming in at $179.5 million beating estimates for $155 million and was up 50% year over year. Net income was up 79% y-o-y to $32.3 million ($1.63 a share) from $18 million (91 cents a share). In after hours trading Sturm was up 6.5% as investors had underestimated the impact of Washington rhetoric on gun owners.

Sturm Ruger is a big gun manufacturer in the US, and has a market cap of $1 billion. Sturm pays out a 4% dividend and trades at a PE (TTM) of 13. Sturm's dividend is up big from last year, with the 2012 Q1 dividend being 21 cents, much smaller than the 2013 Q2 dividend of 49 cents.

While Sturm has a strong dividend yield and no debt on its balance sheet, investors are expecting EPS to fall next year. That drop in EPS makes me sour on the stock for the time being, even if the 2014 election cycle prompts more political rhetoric which could prompt more sales.There is a better gun manufacturer out there for you to invest in. 

Revolvers seem to be popular

Smith & Wesson (NASDAQ: SWHC) posted earnings with guidance that was much higher than expected. Smith posted a revenue increase of 38% to $178.7 million and earnings of $25.2 million, much higher than the $12.5 million posted last year. Gross margin's were also up due to larger sales volumes, rising to 38.3% from 36.1%.

Going forward, S&W guided for an EPS of $1.30 to $1.35 on revenue of $605-$615 million, much higher than the $1.18 EPS on $590 million in revenue expected. Stronger sales will result in better margins and much higher profits as the profit per gun rises, and more guns are sold. Even though S&W pays out no dividend, it has a PE (trailing twelve months) of 10 and is a good buy for the surge in demand.

S&W is expected to keep growing, even as the demand for firearms and accessories cools off, with EPS growth in 2014 expected to be 7%. But with rising margins and an increase in its guidance, that number may get closer to 10%. 10% growth would merit a higher PE than 10 and would push Smith & Wesson's stock price up.

The middle man

Cabela's (NYSE: CAB) is a big seller of firearms and archery. Cabela's executives have stated they expect a slowdown in the firearm surge, but I would point towards another political cycle coming up which could keep demand high. In 2014 and 2016, more ads and rhetoric will probably prompt another start up in the gun debate and provide a temporary boost in firearm sales and accessories.

Another benefit Cabela's has, is an unexpected one: the next movie in the Hunger Games series comes out this fall, which last time prompted a pick up in archery. If the Hunger Games is a success, then I would expect archery sales to pick up and I would expect gun sales to beat Wall Street estimates, just as it did for Sturm Ruger and Smith & Wesson. If this holds to be true there is one more in the Hunger Games trilogy which would boost demand for archery items in few years as well.

When Cabela's last reported earnings it beat on both the top and bottom line by small margins. Comparable store sales were up 10.5%, and even when you exclude firearm sales comparable store sales were up 9%. This is a very bullish sign, as it means Cabela's will be able to easily transition out of the firearm demand surge and still grow at a strong pace.

Cabela's has a PE (trailing twelve months) of 23.7 and an expected growth rate of 17% for the next few years. In the short term Cabela's will be able to outperform Wall Street estimates if firearm sales keep beating estimates and if the Hunger Games prompts strong archery sales.

In the longer term, Cabela's has its next generation store rollout to boost sales. In the same quarter last year, Cabela's had six of its next generation stores open, and in this quarter it had 12. Profit and sales of these same store sales were 40% higher than its traditional stores, and comparable same store sales were 600 basis points (6%) higher than traditional stores' 16.5% rate.

Final thoughts

Even if gun sales start to moderate and the upcoming election cycles don't create a surge in sales, Smith & Wesson still is a good investment as it is raising its guidance and is still expected to grow next year. Because it is still expected to grow, its margins will be able to stay at elevated levels and this will increase the bottom-line. 

Cabela's offers a great investment opportunity, as same store sales are very strong and its long term growth prospects with its next generation stores are very robust. With sales and profits at these stores 40% stronger, and same store sales growth 60% higher than at traditional stores, Cabela's has a long growth runway. 

Sturm & Ruger's has a very strong dividend and a great payout history, but the drop-off in EPS next year is a very big hurdle to get over and not worth risking when Cabela's could offer you 20% EPS growth and strong same store sales.

 

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Callum Turcan 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!

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