Sturm Ruger Shows Up with Guns Blazing
Halina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
My first gun was a double action .357 Magnum Ruger Security Six revolver, which was given to me as a Christmas gift by my partner Michael. It was certainly one of my more unusual Christmas gifts. Later on that year, we argued about my inclination to name our new dog Ruger. Suffice it to say, Sturm, Ruger & Company (NYSE: RGR) holds a unique place in my heart as well as my stock portfolio.
On May 1, 2012, the firearms manufacturing company announced that not only had its exceeded its earnings expectations by 12 cents a share, bringing its diluted earnings to $0.79/share, but that these earnings were almost double the reported $0.42/share earnings of one year ago. Furthermore, Ruger had introduced not one but three new products in 2012, the Ruger American Rifle, the SR22 pistol and the 10/22 Take Down rifle. Ruger's long anticipated SR1911 pistol, introduced back in May 2011, is still on backorder at most ammo retailers like Cabela's (NYSE: CAB) and Dick's Sporting Goods (NYSE: DKS). As if that was not enough, the company also announced in late March 2012 that it had completed its "1.2 Million Gun Challenge to Benefit the NRA", a program that donated $1 to the NRA for every Ruger firearm sold from March 2011 to March 2012. The NRA was the recent recipient of a $1,253,700 check from Ruger, which of course meant that over 1 million Ruger firearms had been sold in just one year.
The company's unprecedented success led to a most curious issue this year: Ruger had to actually stop taking new orders in March so that it could catch up on over 1 million new unit orders for 2012. As soon as this announcement was made, however, the company's stock price went up immediately. Apparently, Ruger stockholders saw no problem with this "problem". Incidentally, the company anticipates resuming acceptance of new orders at the end of May.
So, what is the secret of Ruger's success thus far? Aside from the legalization of concealed-carry permits in several states (including my home state of Wisconsin), many analysts have credited the recent political climate with playing a big role. There is the incessant fear by many gun-toters that President Obama is out to "take our guns". Another election is looming on the horizon and conservatives fear tougher gun ownership restrictions if Obama is re-elected. Indeed, such sentiments were expressly stated by NRA President Wayne LaPierre, who mentioned a "massive Obama conspiracy to deceive voters and hide his true intentions to destroy the Second Amendment during his second term."
The "Obama effect" on gun sales and Ruger's bottom line was also evidenced during his initial election to the presidency in 2008. In summary, it appears that Obama is good for Ruger. This means that Obama is good for my stock portfolio too. And just in case you are worried that Obama is anti-gun, take a look at this recent report provided by the Wall Street Journal stating that the Obama administration believes U.S. firearms export regulations need to be relaxed.
However, letting President Obama take credit for Ruger's success is unfair to the iconic firearms manufacturer that has been doing business for over 60 years and has been publicly traded for over 40. Sturm, Ruger & Company has enjoyed four consecutive years of EPS growth as well as three years of 14% sales growth. Its profitability is something to be admired; as opposed to the industry operating margin of 2.31%, Ruger boasts 18.98%. The company also has no debt.
On the other hand, Smith & Wesson Holding Corporation (NASDAQ: SWHC), whose stock has also been appreciating as of late, does not boast such strong fundamentals. The company's EPS growth rate over the last three years has been negative and its sales growth over that same period of time has been stuck at just 3%. Compared to Ruger's healthy 12.17%, Smith & Wesson's net profit margin stands at only 2.48%. Part of the reason for Smith & Wesson's lackluster financials has been the recent spin-off of its Security Solutions business (previously named Universal Safety Response), which accounted for 13% of its revenue. Another costly acquisition in the company's past was its purchase of Thompson/Center Arms for the princely sum of $102 million.
To state that Obama has been responsible for Ruger's success undermine's the concerted efforts and business acumen of this company (as well as of its President and CEO Michael Fifer) to steadily increase profits and lower costs. Furthermore, Ruger is now looking to execute several strategically advantageous acquisitions that will enable the firearms manufacturer to complete more unit orders in the future.
I am long on RGR.