3 Reasons Why Sturm, Ruger Could Continue to Advance

As gun sales soared over the past six years, shares of Sturm, Ruger & Co. (NYSE: RGR  ) have matched the increase, rising more than 800% in the same time period. After reporting earnings and pushing to all-time highs, do these shares still have room to run?  Three key takeaways from the company's Q3 conference call could help us answer that question.  

CEO Michael Fifer is the right man for the job
A former U.S Navy submarine officer, Fifer attended the Naval Academy and got his MBA at the Harvard Business School. I was particularly impressed during the analyst-management Q&A session. Fifer came off as enthusiastic about the product that Ruger sells, focused on maintaining quality, and confident in the company's ability to execute its business plan. 

Displaying the company's commitment to shareholders, Fifer discussed the potential for another "special dividend," saying:

Obviously, we don't have enough cash at the moment to do one, that would be kind of silly, but if we get back up north of where we were the last time we did it, and we don't have a good responsible use for that cash, by gosh, we'll give it back to our shareholders. It's their money.

And later, in response to questions as to why the company has decided against a share-buyback program, Fifer reiterated that the company is open to doing so, but only if the math behind it makes sense: "...we are primarily interested in taking care of the shareholder who's with us today and will be with us tomorrow."

The intangible value of a management team that inspires confidence from shareholders and loyalty from customers can be hard to quantify, but it's what tends to separate the good companies from the great ones. 

New products, but still focused on the old
Sporting goods megaretailer Cabela's (NYSE: CAB  ) recently made headlines after CEO Thomas Millner reported that, "Starting in August, we saw a significant deceleration in the sales of firearms and ammunition," with same-store firearm sales declining 2.5% in the latest quarter. This news led to weakness in shares of both Sturm Ruger and its competitor,Smith & Wesson Holding Company (NASDAQ: SWHC  ) .  

Part of Ruger's response to that was to remind investors how management encourages customers like Cabela's to maintain higher levels of the company's inventory. Ruger sticks to price-discipline to prevent any older inventory from becoming devalued, and thus hurting the final seller's bottom line.

In Fifer's own words: "... a distributor doesn't have to worry about buying from Ruger and then having us devaluing their inventory down the road just to boost sales. We don't do that and they know it and they trust us and that makes our inventory awfully safe."

So a decline in overall firearm sales, while obviously not positive, won't necessarily prevent retail buyers from continuing to maintain Ruger inventory levels.

The other answer for the decline in sales is the rollout of new product lines to generate enthusiasm.  A superior product will create its own demand, and Sturm Ruger's newer models are aimed at the type of gun owner who pays a premium for higher quality.

Growth: by acquisition or expansion
An interesting question was posed on the conference call: would Sturm Ruger be interested in acquiring Smith & Wesson?

Fifer replied, "I would be delighted to acquire them with stock. I'm not sure they would be as delighted, but if you know something I don't, let's talk afterwards."

While it's just sheer speculation at this point, Smith & Wesson could be attractive to an interested buyer.  Trading at just below four times book value, the company might seek to take advantage of the strength in the firearm market and make itself available for acquisition, as many fellow manufacturers did in 2009.

Meanwhile, Ruger is also pushing its own supply capabilities by opening a new plant in North Carolina that should begin churning out units in Q1 2014.  It's the company's first major expansion in 25 years.

Bottom line
With motivated and experienced leadership, new product lines to drive demand, and multiple avenues for growth, I believe that Ruger is the best bet in the firearm industry.  While we might be seeing a decline in overall firearm sales next year compared to 2013, Ruger is still well-positioned to capture market share from competitors to make up the difference.  

During the call, management noted the possibility for a weak-hands correction in the stock price if demand for firearms softens a bit in 2014. After proper due diligence, if you're interested in buying shares, it might be wise to wait to do so on weakness, or via dollar-cost averaging.  

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