Are Gun Companies Benefitting From Facebook?
Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Pittsburgh Tactical Firearm's Facebook (NASDAQ: FB) page was recently closed, and the owner is concerned. He received hundreds of emails and phone calls over the past several days from some of his 27,000 followers, informing and questioning why the page was shut down. While we can't control what happens there, lets look at what kind of role Facebook and its policies may have on our investments.
More of the story
The numbers show that Facebook now has over 1 billion users, and it generated approximately $5.1 billion in 2012 revenues -- more than 37% higher than 2011's revenues. Erik Lowry, the owner of Pittsburgh Tactical Firearms, was running a giveaway contest of an AR-15 when his Facebook page was inexplicably shut down. He didn't know why, but he did open another page which was also shut down. He has asked Facebook -- at least 100 times -- for an explanation, but has been left to guess what is going on.
While Facebook has not commented on the matter, Lowry has said:
"There are no guidelines that say you can’t give away guns. I still don’t know what’s going on. This kind of censorship is unconstitutional."
Many arguments could be made for either side of this debate. Is it an infringement of rights, or is it a company's right to decide whom it does business with? I will leave that up for others to decide, but what I do know is gun companies are flourishing with all the hype that has evolved in this area over the past few years.
Who might be benefiting the most
Both Ruger (NYSE: RGR) and Smith and Wesson (NASDAQ: SWHC) have gross margins in the 30% range, while Facebook's is 73.2%. This should be expected as Ruger and Smith and Wesson have to build, market, and sell products while Facebook generates most of its revenues from areas like advertisements.
Over the last three years, Facebook's revenues have increased an amazing 258%. Facebook is a fairly new company, and rapid growth is more likely for it than companies that have been in business since 1852, like Smith and Wesson. Ruger and Smith and Wesson have increased revenues by 93% and 1.5% respectively since 2010.
These companies FCF yields are all very different, but some show better value than others. Again, understand that I am not comparing Facebook, a social media company, to a completely different industry, but I do want to show who, in my opinion, offers a better opportunity.
Facebook shows a FCF yield of 0.6% with a market cap of $62 billion. Facebook's P/E is 2,500, but that figure is exaggerated because of its youth and its stock's vulnerability to the media.
Both Ruger and Smith and Wesson show cheaper stocks as their FCF yields are 6.5% and 8% respectively. Both of these companies have a market cap that is under the $1 billion mark.Smith and Wesson and Ruger show P/E's of 8.4 and 13.4 respectively. Ruger is the only company here that offers dividends to its shareholders, and its 3.1% dividend is almost a full percentage point better than the industry average.
The Columbine High School shooting, on April 20, 1999 sparked a gun debate that still rages today. I can remember that day like it was yesterday, and wish that people would have focused more on the victims than debates. However, gun regulations have been implemented since that time, yet both gun companies have performed very well. The chart below shows exactly how well they (particularly Ruger) have performed since April 1, 1999.
We all know about the challenges Facebook's share price has faced with its horrific IPO, the rebound from August until February, and its slight decline since then, but these gun companies don't get quite as much press coverage. 2012 was Ruger's weakest performance since the 2008 crash, and it still increased by over 53%. In fact, the stock has risen 303% since 2008. Smith and Wesson has increased 182% since 2008 despite a more than 8% drop in 2010.
The last thing I will look at with these companies for now is their earnings yield. Again, Facebook doesn't bode well in this area. It only shows an earnings yield of 0.04% while, in a different industry, Ruger and Smith and Wesson show 7.5% and 11.1%.
The Foolish bottom line
Facebook is certainly not keeping up with the investment opportunities that Ruger and Smith and Wesson offer. Ruger and Smith and Wesson appear to offer reasonably cheap stocks, increasing revenues, and good long-term performance. With all the talk of gun regulations, the best news may be how well these two companies perform despite increased scrutiny and limits.
Tyler Wofford has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook and 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!