Weak Gun/Ammunition Sales Might Create Buying Opportunity

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

This morning, the outdoor sporting goods retailer Cabela's (NYSE: CAB  ) reported earnings. The company had a killer quarter, in which its earnings per share increased 16.7%, at $0.70, higher than last year's $0.60 during the same quarter. The increased profit came on the heels of 14.8% higher revenue, quarterly comparable-store sales up 3.9%, and increased gross margins on merchandise, which is now at 37.3%. The comparable-store sales increase was the eighth consecutive quarter the company managed to beat its previous mark and would have been an increase of 5.3% when gun sales are backed out.  

Yes, you read that correctly! If gun sales are backed out, same-store sales would have been 5.3%, not the 3.9% Cabela's reported. While ammunition sales were slightly higher during the quarter than last year, firearm sales meaningfully weakened during the quarter. While Cabela shareholders didn't seem to mind the news as shares closed the day higher by 0.35%, other companies didn't fare so well on the news.

Shares of gun makers Smith & Wesson (NASDAQ: SWHC  ) and Sturm, Ruger & Co. (NYSE: RGR  ) fell hard on the news. Smith & Wesson lost 2.71% today while Sturm, Ruger lost 6.09%. Both companies rely on gun sales for nearly all of their revenue and since neither company has reported quarterly earnings to coincide with Cabela's results, shareholders pushed share prices down.

But today's move may be good news for those looking to buy cheap stocks at even cheaper prices. The move we experienced with shares of Smith & Wesson and Sturm, Ruger were very quick responses to comments that could potentially have zero impact on these companies' actual performance. Cabela's simply stated that firearm sales were down during the quarter, not which manufacturers sold fewer guns than in previous quarters. Additionally, this quarter's move shouldn't have come as a big surprise since in the past gun sales were driven by the fear that tougher regulation would be imposed, not something we really heard about this most recent quarter.

After today's decline, shares of Smith & Wesson are trading at only 8.23 times past earnings and 8.07 times future expected earnings. That is not too bad for a company that recently experienced quarterly revenue growth of 25% and quarterly earnings growth of 48%. And on top of that, shares are only up a little more than 11% over the past 52 weeks, meaning if revenue and earnings growth continue at their current pace, shares may really take off. 

While  Sturm, Ruger shares aren't as cheap as Smith & Wesson's, there may still be value after today's decline. The stock currently trades at 13.48 times past earnings and 16 times future expected earnings. While that would indicate analysts don't believe it can continue its recent 79% quarterly earnings growth figure or its 50% quarterly revenue increase in the future, lower sales have already been priced into the stock and analysts certainly have been warning investors. So the comments from Cabela's today shouldn't have surprised investors. Thus the 6% move lower was certainly overblown and allows savvy investors who were waiting for the market to irrationally misprice a stock a good buying opportunity.  

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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On October 24, 2013, at 11:32 PM, whyaduck1128 wrote:

    If they're comparing gun sales for this particular quarter to the same quarter last year, they're down. The bigger question is how their gun sales were vs. the same quarter in previous years. A given quarter's gun sales could be driven by gun owners' reactions to any given crusade by the "gun control" fanatics, who blame the gun every time some idiot or crazy goes amok.

    Another way of saying it--Was there anything anomalous about 2012's sales numbers? Were 2013's sales up or down from 2011, 2010, etc.?

    whyaduck

    Non-gun owner

    Long SWHC

  • Report this Comment On October 25, 2013, at 5:34 AM, VikingBear wrote:

    Comparing Sturm-Ruger to Smith and Wesson should take into account that they have different prices for similar products. Smith and Wesson has a reputation for very high quality and is frequently preferred by enthusiasts.

    Its reputation as the most powerful handgun on earth has been driving sales of its Model 29 in .44 Magnum since Clint Eastwood's movie character Harry Callahan coined the phrase "Go ahead, make my day". Although since surpassed by a number of competitors, it is still seen as such by the general public.

    Sturm-Ruger, however, does not enjoy the same reputation. Its quality is excellent, and the ballistics of their offerings in .44 Magnum with similar barrel lengths as the S&W 29 are virtually identical. Where Sturm-Ruger has an advantage is price across the board. Its "Service-Six", in .357 Magnum /.38 Special was designed for mass production of an economical handgun for cost-conscious police departments, and individual officers, or security guards who must provide their own weapons.

    During the latest rush to get a gun before it becomes difficult, price became an important feature. Both S&W and Sturm-Ruger lost potential sales to secondary manufacturers, athough they did quite well, thank you. The secondaries are largely imported from overseas, and could not ship enough fast enough to take full advantage of the demand spike. This led to an unusual, and temporary, situation where for many of the demanders, supply availability drove sales. (The cheap ones sold out fast, and the more expensive ones got the benefit of the disruptions.)

    As an example, I purchased the last Italian import on display in .357 Magnum because I could afford it, when there were plenty of Colts in .45 ACP that I wanted--for over twice the price.

    My recommendation is to buy and hold stock in firearms and ammunition makers. Also, consider taking an inventory position in the products, and holding them indefinitely. Gold is the best hedge against inflation, but weapons and munitions are the best hedge against chaos.

  • Report this Comment On October 25, 2013, at 3:09 PM, KidShazaam wrote:

    How much of those decreased gun sales were due to lack of availability? Don't get me wrong, the gun market is nothing like it was the first few months of the year, but it doesn't mean you can find anything you want. There's still backorders from Jan-Feb that have not been filled. Think of the sales they can make just restocking retailer shelves and wholesaler warehouses. They're not empty anymore, but they're far from full. How many sales did Cabela's lose because they told the customer they didn't have it and couldn't get it? Ammo is 100 times worse, which is why they had a "slight" increase. If they somehow could have magicly bought as much as they wanted it would have been through the roof.

    Long SWHC (but will probably sell at next quarterly report, which will surprise "everybody" (read know-it-all analists not in the industry).

    Long ATK Always scary with the government contracts, but the financial media seems to have no understanding not only that the gun and ammo markets are not one and the same, but more importantly that right now you can sell an infinate amount of ammo as consumer demand has been pent up all year and everybody is waiting (plus they want to stock up for the next time) and shelves are empty everywhere you go. As the hunting season comes around not only is it gonna be pistol ammo like it's been all year, but large centerfire as a whole is gonna HARD to find. Even shotgun shells are stressed, although not as much of course. OLIN would be fine too right now, but ATK is more aggressive on the cheaper stuff that will be in demand for a long, long time. Twice in 5 years, so everyone wants to put away a little stash if they can find a reasonable deal.

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