A Look at Firearms and Ammunitions Manufacturers
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I am a financial journalist, and my work is far removed from what took place in a Connecticut school the other day. However, this morning, when I sat back to write about another stock, another company, I just wanted to see how the firearm manufacturers are doing these days.
Note this is not a political article. I have no axe to grind, for or against firearm manufacturers. I am also aware that a majority of their businesses is done with the government, which means they had almost nothing to do with the gun in the hand of that 20-year old. So, again, this is not a political article. I am just curious, as a journalist and as an investment analyst: how do the firearm manufacturers perform in our economy?
The Freedom group, which is one of the largest firearms and ammunitions company in the world, is privately owned. So are Remington and Bushmaster and other big names in firearms such as Colt Defense LLC, Springfield Inc. and Browning Arms Company.
However, the following three companies are publicly traded; Smith and Wesson (NASDAQ: SWHC) and Sturm, Ruger & Company (NYSE: RGR) - both leaders in the firearms segment- and Alliant (NYSE: ATK) a leader in the law enforcement and sporting ammunition segment.
Smith & Wesson Holding Corporation
SWHC is a manufacturer of a range of firearms and sells them under different brands such as Smith & Wesson, M&P, Thompson/Center, and Walther. Its products are catered for a range of customers that include hunters, sportsmen, competitive shooters, gun enthusiasts, collectors and those looking for firearms for protection and military and law enforcement agencies in the United States and across the world. Its product range includes handguns, sporting and hunting rifles, black powder firearms, handcuffs and allied firearms-related accessories.
As at close of trading on December 14, the market cap of Smith and Wesson is $516 million and EPS of $0.83. At a CMP of $7.79, SWHC was trading at price to earnings ratio of 9.4. For the last four quarters, SWHC has been beating earnings forecasts comfortably. Analysts who track the company forecast an earnings growth of 157% this year and an average growth rate of 30% over next five years.
Source: Nasdaq website
For the six months ending October 2012, the company reported an increase of 48% in net sales over the same period prior year, up from $888.5 million to $272.6 million.
With a YTD return of 109.4%, the stock has given an excellent return to investors.
Considering its penchant for beating analyst forecasts, strong fiscal quarter results and positive outlook for 2013, Smith and Wesson presents a good opportunity for investors looking for decent appreciation. Out of the six analysts making recommendations on SWHC two recommend it as a strong buy. The other four recommend buying and holding it.
Sturm, Ruger & Company
Sturm, Ruger & Company is a dividend paying company engaged in the business of design, manufacture and sale of firearms to US customers. The company has two segments. The firearms segment manufactures and sells rifles, pistols, revolvers, and shotguns mostly to licensed independent wholesale distributors, most of whom are located in the United States. The other segment is involved in the manufacture and sale of investment castings. However, more than 90% of sales are from the firearm segment.
With a market cap of $777 million, RGR is almost one and half times bigger than SWHC. The company has been paying quarterly dividends since 1990 with a three-year break from 2006 to 2008. The company resumed paying dividends from 2009 and currently has a dividend yield of 3.5%. In May 2012, it paid a special dividend of $4.50 per share. RGR stock has also provided investors with handsome returns. The stock has appreciated nearly 450% in the last five years.
Like Smith and Wesson, RGR too has been beating market forecasts by comfortable margins in the last four quarters. Earnings growth for the year ending December 2012 is being forecast at 55.50%.
RGR is mostly viewed as a dividend play and with an EPS of $3.12 per share it is expected to keep paying dividends. However, it is trading at a high P/E ratio of 13 and recommended only for investors looking for a steady income from their investment. Of the two analysts making recommendations on RGR and each had a differing opinion: one recommends a strong buy and the other expects it to underperform.
Alliant is another dividend paying company in the firearm sector. The company operates in 23 states, Puerto Rico and internationally in the aerospace, defense and commercial space. Primarily, it is a manufacturer of small-caliber ammunition for weapons normally carried by soldiers such as automatic and semi automatic rifles and machine guns. A much larger market cap ($2.01 billion) as compared to the two firearm majors (SWHC and RGR), ATK has an EPS of $7.53 and is trading at P/E of 8.33.
In the quarter ending September 30, the company reported a moderate decline (-3.57%) in net sales as compared to the same period prior quarter. However, the decline for the six month period ending was 1.50%. ATK has been beating earnings forecasts continuously for the last four quarters.
Although analysts forecast a negative earnings growth for the fiscal 2013, they expect ATK's earnings to grow at an average annual rate of 2.93% for the next five years.
Considering a dividend yield of 1.69%, a handsome EPS and that the stock is currently trading at a reasonable price-to-earnings ratio, ATK offers a good opportunity to investors looking for a reasonable return on investment - dividend income and stock appreciation.
Record Gun Sales
There is absence of true statistics for actual gun purchases in the U.S. However, study of indirect evidence reveals that gun sales are on the rise and beating previous records. The FBI received 154,873 requests for background checks on potential gun owners on Black Friday this year as compared to 129,166 last year, an increase of 20%.
According to an agency report published last year and cited by spokesman for the Bureau of Alcohol, Tobacco and Firearms, Mr. Ginger Colbrun, 5.5 million guns were manufactured in 2009, which was 1 million more than 2008. The natural inference is that if they are being manufactured, they are selling.
The weapon used by the shooter at Sandy Hook Elementary School, Newtown, Connecticut, was a Bushmaster AR-15 rifle with magazines of 30 rounds. There were two more weapons: Glock 10mm, a lightweight and affordable weapon and Sig Sauer 9 mm, an expensive and a high-quality weapon often used by elite military and police. While the Glock and Sig Sauer are made in Austria and Switzerland, the Bushmaster is very much an American product manufactured and marketed by Bushmaster Firearms, a part of the Freedom Group that also owns Remington Arms, the top seller of arms and ammunitions in the U.S.
The shares of all three companies reviewed above took a hit recently probably on fears of a ban on gun sales.
As stated earlier, the Connecticut incident has nothing to do with firearm manufacturers. As you will see, the least hit was ATK, the company that manufacturs ammunition for guns used by the military and police units.
The incident has however brought the debate about gun laws back into the limelight. If I was an investor in the firearm industry, I would keep monitoring progress.
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