Is Sturm, Ruger's New Plant a Bad Idea?

On Monday, Sturm, Ruger (NYSE: RGR  ) announced the pending purchase of its third manufacturing plant, representing the gunmaker's first major expansion in more than 25 years.

The 220,000-square-foot building, which is expected to be finished by August, will stand as Sturm, Ruger's third facility.

So why is Sturm, Ruger expanding its manufacturing capabilities now?

If you build it, they will come ...
Remember, in April, the company told us its first-quarter earnings rose 53% year over year, driven by a 39% revenue increase over the same period as well as improved operational efficiency.

Even so, while Sturm, Ruger spent $7.7 million last quarter developing new products and expanding production capacity, demand for its weapons continued to outstrip supply as sell-through with distributors was effectively capped by its limited first-quarter production capabilities.

And Sturm, Ruger certainly isn't alone trying to manage this enviable problem; last month, fellow firearms manufacturer Smith & Wesson (NASDAQ: SWHC  ) sealed a record year with its solid fiscal fourth-quarter earnings report. In fact, Smith & Wesson's own 38% quarterly sales growth stood nearly identical to Sturm, Ruger's most recent revenue increase, while Smith & Wesson's net income rose an even more impressive 63%.

Party like it's 2013
However, while most industry executives believe this surge in demand should still have some steam left in the tank, it's safe to say it certainly won't last forever.

In fact, that's why Smith & Wesson CEO James Debney reassured investors during his company's last earnings conference call that it's being careful about building out its own manufacturing capacity, adding it only where the company believes "it is appropriate, and with a focus on balancing internal capacity expansion with the outsourcing of selected components."

In Debney's words, then -- and as I also noted at the time -- this affords Smith & Wesson the flexibility to fulfill this demand while "providing a layer of insulation should the markets soften."

By contrast, Sturm, Ruger's new manufacturing plant is decidedly more permanent.

And therein lies the rub: From an investor's standpoint, we can't forget there's risk involved, as Sturm, Ruger could be overbuilding its manufacturing facilities only to watch demand for its products taper off.

Then again ...
It's also quite possible Sturm, Ruger got a great deal on the property and that the financial outlay may not be all that significant. After all, the company did already tell investors it planned to spend a total of $30 million in capital expenditures by the end of this year, and as of the end of last quarter, it had no debt with cash and equivalents of $45.6 million on its balance sheet. What's more, Sturm, Ruger also managed to generate $30.4 million in cash from operations during last quarter alone.

In addition, remember that new products represented around 35% of all Sturm, Ruger's firearm sales last quarter, so it's obvious consumers are responding well to the company's latest offerings. As a result, if Sturm, Ruger is managing to take market share from its competitors, it's possible the company could still make use of the new facility even after today's record demand wanes.

In the end, then, over the short term this seems like a great idea, but long-term investors would be wise to keep an eye on firearms industry demand to see how it affects Sturm, Ruger's distributor inventory levels.

But what do you think? Is Sturm, Ruger's new manufacturing plant purchase a bad idea? Feel free to weigh in using the comments section below.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 10, 2013, at 8:45 PM, stockdissector wrote:

    Steve,

    This is a legitimate concern. The spike in gun demand stems from fears (whether warranted or not) from the recent gun debates. Fear has a tendency to dissipate. I believe once this happens the fundamental gun bubble could burst or at least shrink which means Sturm, Ruger will sit on a great deal of manufacturing capacity and be forced to cut prices.Resulting in share price butchering losses.

    Sturm, Ruger will need to really step up product innovation to make up for any potential shortfall.

  • Report this Comment On July 10, 2013, at 8:55 PM, wolfman225 wrote:

    I think they'll be fine. While demand won't keep up the torrid pace of the last few years, I believe that there have been enough new customers introduced to firearms and the shooting sports to more than cushion any fall.

    Once you get into the sport, it's rare that any gun enthusiast stops at only a single gun or rifle.

  • Report this Comment On July 10, 2013, at 10:01 PM, CrazyDocAl wrote:

    Ruger is moving out of New England and into friendlier states. NC is not going to pull a CT on them. When things slow back down Ruger will look to close a plant and I wouldn't want to be working in the NH plant.

  • Report this Comment On July 11, 2013, at 12:08 PM, jtice01 wrote:

    I think Crazy Doc may be right. We could very well see Ruger back down to two plants as soon as this one is back up to capacity. It doesn't make sense to shut down production when demand is high, but it is obvious from recent legislation that the gun industry in the New England states lives in constant jeopardy.

  • Report this Comment On July 11, 2013, at 7:08 PM, longshotlouie wrote:

    Observers have predicted the end of the gun 'bubble' for years, yet all states have recently approved concealed carry laws, and there are millions of potential new gun buyers as a result. Sturm Ruger is a solid company with no debt that makes great products. I'm buying at these levels.

  • Report this Comment On July 12, 2013, at 4:56 AM, ragnarok1776 wrote:

    Arms makers are pretty much demonized in New England. Ruger has made no secret that it has been looking at more gun friendly areas, and it is horribly backlogged on orders so the NC purchase certainly comes as no surprise to me. Ruger can ramp up production, stop losing sales because of lack of supply (let's face it, in the current market if people cannot get the gun they really want because it is not available they will go for their second choice rather than wait) and take a larger market share. One thing that people who talk about the "gun bubble" do not seem to realize is that there are three major factors that will continue to drive sales for years to come: 1. Most of the new first time buyers are going to get trained, which means that a great many of them will find that they enjoy shooting and will purchase additional guns. People tend to own 0 guns or several guns. 2. The baby boomers are getting old......and us old codgers are not as proud of our physical prowess as we once were......we like the added sense of security of carrying a gun. A lot of older folks are joining the ranks of first time gun owners. 3. A decade ago very few women owned and carried guns. That has changed. More and more women are buying guns for self defense, and getting trained to use them. I attended a 4 day defensive handgun course at Front Sight last month. There were about 300 of us taking the course and a good third were women.

    Ruger makes excellent firearms and is constantly adding new models. I doubt that it will have any problem at all keeping three plants busy for a lot of years to come...........and if I am wrong they can always scale back the NH plant or close it down and sell it, probably for a lot more than they paid for the NC plant, and be located in a far more gun friendly state.

  • Report this Comment On July 15, 2013, at 10:55 AM, nmchristie wrote:

    It is NOT a bad idea, for a couple of reasons:

    1) Despite what the uninformed are saying, most of the recent firearms growth is not driven by short term (Obama-ban) political fear. It is driven very strongly by new firearm owners - as unpopular as it may be to "the elite," the % of people owning firearms is increasing. Go to gun shows and dealers and look at who is buying, talk to them.

    2) Ruger, in particular, is introducing new and popular-priced wuality firearms precisely into the fastest growing market segments.

    3) Look where the new plant is - and look where their current main facility is. Hmmm - politically different. So build the new place, and if you ever do need to consolidate the company - close the northern facility, where the land value is much higher and the political climate is much more oppressive. They just bought themselves a Plan B.

    I am long Ruger.

  • Report this Comment On July 15, 2013, at 3:30 PM, GodEnriches wrote:

    The bogus elements of this article have been repeated every quarter for the last three years. Contrary to such articles, gun buying keeps increasing. The author needs to check in with shooting ranges. The number of women buying guns is exploding. Gun classes are full. Many shooting range memberships are capped at their maximum. New shooting ranges can't be built fast enough. As concealed carry laws expand across the country, Ruger is primed to fill the need, which will keep increasing.

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