Pistol-Packin' Mamas and Profits

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

It's almost impossible to get definitive statistics on actual gun ownership rates in the U.S., with the Pew Research Center saying it's 37% and Gallup giving 43%. One thing the polls do point toward is more gun-owners than ever before cite protection as their primary reason for owning one, with women coming in at 65% and men at 42%.

And from the Christian Science Monitor, 15% of American women are gun owners, up 3% in the the last six years. Granted that it is not a dramatic increase, but the NRA has seen almost a twenty-fold increase in enrollment in its Women on Target gun training program since 2000. One Texas woman, who makes high end gun carry purses (a crocodile bag will set you back $3,400) has seen business rise 30% this year. 

When I last visited Cabela's, there were just as many women filling out gun paperwork as men. The FBI reported a 53% increase in background checks for guns in the ninety days after the election.

Earn while they learn

One thing more women are doing is signing up for gun safety classes (hey, we actually read owner's manuals). According to Joseph Terry, a former police officer who now takes gun safety classes, it really takes about 500 rounds of ammo to be considered proficient.

Where does all this ammo come from? Two companies mainly, Alliant Techsystems (NYSE: ATK) and Olin (NYSE: OLN). Their ammo divisions are merely one division of their larger businesses, defense and chemicals, respectively. There are not a lot of pure plays on ammo as Remington, privately owned by Cerberus Capital Management, is the only company that produces both firearms and ammo.

There has been an ammo shortage in the U.S. since the election, which is only recently easing up with some imports of ammo getting through and Remington ramping up production.

CEO Joseph Rupp of Olin said of its Winchester ammo division on the earnings call on July 25, "The elevated level of commercial demand that the Winchester business began to experience in the fourth quarter of 2012 continued through the second quarter. Second quarter 2013 commercial sales increased approximately 60% compared to the second quarter of 2012. And as a result, Winchester achieved the highest level of quarterly segment earnings in its history."(source Seeking Alpha transcript).

And front and center on the call, he attributed the company's robust earnings mainly to the ammo segment (record quarterly sales of $198 million) with their other two segments, Chemical Distribution and Chlor-Alkali, both seeing softer earnings.

Like gun manufacturers Sturm, Ruger & Company (NYSE: RGR) and Smith & Wesson, which had major backlogs last year, the company has seen an increased backlog of $650 million from $255 million in June 2012. This good news comes on top of lower commodity prices for copper, lead, and zinc. CEO Rupp added,"Winchester sales continue to be limited only by their ability to produce product."

Olin has a trailing P/E of only 12.58. It's shareholder friendly, paying a yield of 3.30%, on the high end for the chemical industry. The company has paid a dividend consecutively for over 86 years. Olin has been buying back shares to the tune of 1 million shares, with 2 million left in the Board approved repurchase. Surprisingly, it is only up 16.67%, possibly because it is seen as more a chemical company with a legacy ammo business.

Competitor Alliant Techsystems also operates in three divisions: Armament Systems, Aerospace Systems, and its Security and Sporting segment which sells ammo as well as related equipment like scopes, reloading, and other paraphernalia to the military, government, law enforcement, and commercial retailers. This segment makes up a quarter of sales.

The Armaments System somewhat overlaps as it also makes ammunition and holds a leading position in small and medium caliber ammunition in the U.S. But, it also manufactures high tech weaponry and is highly sensitive to trends in government spending as is its Aerospace systems.

Realizing Sporting systems is its bread and butter and was its best performing division. Last year, the company acquired Caliber Co and its subsidiary Savage Sports, a firearm maker for $315 million.

It's trading near its 52-week high of $93.86 before it reports on Aug. 1, having run up 98% this last year. It offers a smaller yield at 1.10% but at a reasonable 12% payout ratio. This name isn't quite as compelling at this level with its 6.33 PEG, although the trailing P/E is only 11.02. With government spending so uncertain, it's not a name to go all in.

Lastly, small cap Sturm, Ruger &Co is reporting on July 31 and is a 4% yielder with a 12.30 trailing P/E. With great numbers already out from Cabela's, especially from its firearms and shooting departments, Sturm, Ruger should again find beating expectations as easy as...er, shooting fish in a barrel. Of interest, Ruger has a close relationship with Cabela's, offering its Cabela's Club members special events at its Ruger Gunsite Academy. The company also sells pepper spray products and offers advice on self-protection aimed at women in a series of videos titled Don't Be A Victim.

It's worth mentioning that Sturm, Ruger had rocketed much higher over the last few years, but pulled back almost 20% after the tragic Newtown shootings and is now only up 1.23% over the last 52 weeks. It seems unfairly oversold with its 22.65% revenue growth over the last three years even before the company shot out the lights with its last earnings release, growing EPS by 52% and revenue by 39%. The company has no debt, the return on equity is 60.34%, and the operating margin is 22.99%.

This would be a practically perfect stock if it weren't so vulnerable to headline risk. Nonetheless, the beta is only 1.06. And there is the teeny matter of a huge short interest at 25.80%.

The Foolish takedown

Self-protection for men and women is more of an issue every day and these three companies make it possible and profitable. Of the three, Olin is one that is not as volatile with that chemicals revenue stream and yield. Next, I like Sturm, Ruger and think that it is oversold. Alliant is just too dependent on government defense contracts, but its latest acquisition of Caliber Co is a positive.

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AnnaLisa Kraft 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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