Gun Control Talks Haven't Curbed These Companies
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With the nation discussing the future of gun control and background checks, some Americans purchased even more firearms in anticipation of changing regulations. In March 2013 there was a 26% increase in the number of background checks performed for firearms sales. Investors can benefit from this sales trend in two different ways: firearm retail stores and firearm manufacturers.
The big retailer
Cabela’s (NYSE: CAB) recently reported its earnings for the first quarter of this year. Earnings per share beat estimates by $.11 with a total EPS of $.70. This was a 75% increase from the same period last year. Much of this had to do with the increase in firearms sales across the country.
Cabela’s is an outdoors and sporting goods retailer. It operates 41 mega-stores across the United States and Canada. The company also offers financing services for the equipment, goods and vehicles it sells.
In addition to a high earnings growth, total revenue grew by 25%. This is great for investors for two reasons. The company is bringing in more revenue and keeping more of it as earnings grew at a higher rate than revenue. Plus, same store sales increased by 24% this quarter.
Total firearms and ammunition sales grew by just 9%, though. So Cabela’s isn’t profiting just because of a fear of gun restrictions. It has been able to grow total revenue above and beyond its firearms sales. This growth should continue through the summer and fall months as boating sports, fishing and hunting become more popular.
The CEO said on a conference call that the stores are having a difficult time stocking enough ammunition. The demand is so high that the supply isn’t keeping up fast enough. This is another great sign for investors. Hunting equipment makes up 60% of the company’s total retail revenues. As the demand stays high for ammunition, Cabela’s will still see high growth rates. There is a risk of ammunition supplies not being able to manufacture enough to supply every retailer.
The firearm manufacturers to watch
Outdoors and hunting retailers are the obvious companies to look at during times of peak firearms purchases. Another industry to take a closer look at is the actual firearms manufactures. Two of the major manufacturers are Smith & Wesson Holding Corporation (NASDAQ: SWHC) and Sturm, Ruger & co (NYSE: RGR).
Smith & Wesson manufactures products for protection and sports in the United States and internationally. In addition to its Smith & Wesson brand, it has products under M&P, Thompson/ Center and Walther.
The company is set to report its next earnings on June 3 for the fourth quarter of this year. Analyst expectations are that revenue will be $171 million for the quarter. This would be a 31% increase from the same time last year.
The company will likely have an increase in net profit margins from its current 13.11%. This is because overall marketing expenses should be lower. Total selling, general and administrative expenses represent 15% of all revenues. With the demand for firearms rising, S&W won’t have to spend as much on marketing. With a high demand, just offering the supply may be enough for this company.
Some analysts call for a 50% increase in the stock price in the next year. This isn’t too high of a price target with rising demand and lower operating expenses.
Another strong company to look at is Sturm, Ruger & Co (NYSE: RGR). The Ruger brand of firearms is very popular, much like Smith & Wesson.
Sturm is posting earnings on April 29. The general consensus from Wall Street is that earnings per share will be roughly $1.01. This is an increase of 27% from the same time last year.
Cabela’s recently named Sturm its vendor of the year. So, Sturm will benefit from that company's recent success as well. These two are tied together for at least part of their continued success.
If you currently have Sturm in your portfolio, hold on to it through the earnings release. Watch for strong patterns of sales in the earnings release and reevaluate afterwards.
When there is a possibility for the restriction of a supply of goods, it is common for demand to spike. It is likely talks of gun control and other firearms restrictions will continue in the future. Investors who want to capitalize on the increase in demand should look no further than Cabela's, Smith & Wesson, and Sturm & Ruger.
Austin Higgins has no position in any stocks mentioned. He is the President of Avant Venture Group and focuses on building businesses through innovation, growth and investment. Read his company's blog at BuildInvestGrow.com and follow him on Twitter @Austin_Higgins.
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