Sturm, Ruger: As Good as They Come
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shareholders in gun manufacturer Sturm, Ruger (NYSE: RGR) have benefited greatly from the recent surge in gun demand driven by gun control and crime rate fears. Its stock price increased 45% over the past year beating the S&P 500 (see chart below). Looking at Ruger from the standpoint of strengths, weaknesses, opportunities, and threats should help you understand the direction of this company.
Focused management – The keen focus of Ruger’s management drives this company. Ruger’s CEO Michael Fifer owns approximately 1.3% of the company’s stock, which incentivizes some of the focus.
Fifer’s focus on accurate production planning shows with his focus on the “sell-through” rate or the rate of sales from the distributor to the retailer. Backlog showed an astronomical rise in the gun industry and he feels that the sell-through rate provides a more accurate picture of industry fundamentals. This line of reasoning stems from industry-wide over-ordering from distributors due to fear of lost sales opportunity because of a low supply of finished goods. Ruger’s sell-through rate increased 63% in 2012.
In their latest earnings calls weapons makers discussed the vast expansion of backlog. Ruger’s backlog more than doubled to 1.5 million units in 2012. Rival gun manufacturer Smith & Wesson (NASDAQ: SWHC) saw its backlog triple so far. Winchester, the ammunitions arm of chemical company Olin (NYSE: OLN), saw its backlog increase by a factor of ten in 2012.
Ruger’s management demonstrates remarkable ability to maximize production for every capital expenditure dollar. According to Ruger’s last earnings call, a 7% increase in capital equipment base led to a 52% increase in unit production.
Strong brand – Ruger represents a well-recognized brand name with a rich history. This also serves as a barrier to entry. Someone new can manufacture a gun, but it won’t possess the Ruger name.
No debt – Ruger’s long-term debt to equity ratio clocks in at a goose egg. This shows great restraint in an environment of cheap debt. In its last earnings call Smith & Wesson shows up in the rear view mirror on this front with a 13% reduction in its long-term debt to equity and expressed plans for paying down more debt.
Lower cash position – At the end of 2011, Ruger sat on $81 million of cash representing 59% of stockholder’s equity. In December 2012, Ruger paid out $87 million in special dividends reducing the cash balance to $31 million at the end of the year or 33% of stockholder’s equity. Consequently, Ruger had to increase its line of credit by $15 million in case the need for more cash arises. By contrast, Smith & Wesson, who didn’t pay a special dividend, still sports a cash balance of $59 million net of restricted cash or 38% of its stockholder’s equity.
Low inventory – Ruger said that it would like to increase its lower than acceptable rate of replenishment for finished goods, but it probably won’t happen until demand subsides a little.
New products – Sturm, Ruger’s opportunity lies in new product development. New products represented 38% of its 2012 sales. Ruger’s management continues its focus on research and development through the continual hiring of qualified talent to design new guns.
Bubble demand – Gun control and crime rate fears boosted the revenues of the entire gun industry at unsustainable levels. Revenue in the most recent quarter increased 52%, 39%, and 27%, respectively, for Ruger, Smith & Wesson, and Olin’s Winchester unit (people need ammunition for the guns). Any pull back in demand momentum may scare investors into dumping their shares in those companies. At that point, long-term investors could pick some shares of Ruger on the cheap.
Competition – Smith & Wesson also commands the resources to do research and development and make acquisitions that could increase its scale relative to Sturm, Ruger.
In summary, Ruger shows focus, prudence, and efficiency in managing its resources. It possesses a strong brand identity. Ruger reinvigorates consumer interest with new products with Smith & Wesson watching. Bubble level demand will most likely subside causing a short-term reversal in gun related stock prices creating a better entry point for the shares of Sturm, Ruger and Smith & Wesson.
William Bias owns shares of Sturm, Ruger & Company. 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!