Which Firearm Stock Should You Pick
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the recent shooting in Santa Monica, gun control has again become the center of political debate. Only this time, the availability and use of assault rifles for domestic purposes is being questioned. As a result, customers are buying their preferred weapons while they still can, which is benefiting the entire gun manufacturing industry.
Which Gun Manufacturer To Pick?
Sturm, Ruger & Company (NYSE: RGR) and Smith and Wesson (NASDAQ: SWHC) are the leading U.S based gun manufacturers. Each has a wide range of offerings, but Sturm, Ruger has been growing at an exceptional rate. Over the last 5 years, shares Sturm, Ruger have appreciated by over 600%, while its operating cash flows have surged by 1680%. Meanwhile, shares of Smith and Wesson have appreciated by nearly 80%, while its operating cash flows have grown by 57% over the same period.
Although Smith and Wesson has performed well over the last 5 years, the stellar growth rate of its competitor gives little reason to pick Smith & Wesson over Sturm, Ruger. From the standpoint of valuations, both companies appear to be significantly undervalued. In fact Sturm, Ruger operates with little or no debt, while Smith and Wesson’s debt/equity ratio stands at 32%. Furthermore, Sturm, Ruger’s net margin of 14.7% is higher than Smith & Wesson’s 11.1%.
Why Sturm, Ruger?
One of the main reasons why Sturm, Ruger has outperformed Smith & Wesson is because of its favorable product mix. Sturm, Ruger designs and manufactures firearms for domestic consumers. On the other hand Smith & Wesson has a diverse range of offerings, which caters to the needs of domestic consumers along with law enforcement and military agencies. In fact Smith & Wesson generates 20% of its revenues from the sale of military grade firearms (including assault rifles).
With the kind nuisance that assault weapons have created, there is a chance that assault rifles could be banned for domestic consumers. If U.S citizens are concerned about their safety, they can buy firearms, just not military style. This very argument has heated up several discussions, and consumers are now scrambling to get their hands on their preferred firearms while they still can.
As a result Smith & Wesson recently posted record quarterly sales of $719 million. But I don’t think that this rally is sustainable over the longer run. This is because its sales bonanza is mainly driven by just a sense of urgency stemming from the threat of legislative changes. But the bottom-line remains that Sturm, Ruger doesn’t manufacture military grade firearms, which isolates it from such risks.
Is Sturm, Ruger alone?
Naturally if firearms are being sold at a record rate, the demand for ammunition should be off the roof. This is why ammunition manufacturer Olin Corp. (NYSE: OLN) recently reported a 24.2% YoY increase in its quarterly sales, coupled with a 4.6 % quarterly increase in its net income YoY. As a result, its shares have risen by 25% over the last year.
But its relatively mediocre growth rate can be attributed to the fact that procuring ammunition is still difficult. And given the current firearm-related rage amongst the general public, I don’t think that its availability will become any greater.
With that in mind, I think investors should stick to Sturm, Ruger & Company. Its product line incurs relatively lower risks of domestic obsolescence, which somewhat offers a relatively stable growth trajectory. And apart from that, its shares carry a hefty yield of 4.1%. In my opinion, Sturm, Ruger would make a great income growth stock for medium-term investors.
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Piyush Arora 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!