Time to Reload on Sturm, Ruger?

Imagine how the markets would have reacted to bad news for gunmaker Sturm, Ruger (NYSE: RGR  ) . The company just reported phenomenal results for second quarter. Sales were up by 50% compared to last year. Earnings per share jumped 63%. Yet the stock fell over 10% in intraday trading following the earnings announcement.

Does this counterintuitive sell-off present a buying opportunity? Let's look at the bullish and bearish arguments for Sturm, Ruger.

Bull
We could focus on Sturm, Ruger's stellar revenue and earnings growth. We could emphasize the company's strong return on invested capital and equity growth. We could point to the dividend yield of 2.6%. Better yet, we could just go read fellow Fool Dan Caplinger's great review of the company that showed that it scores a 9 on a 10-point scale for stock perfection.

Instead, I would like to call your attention to the following chart.

Source: Company 10-Q report.

Three things stand out related to units ordered. First, you probably notice a decrease in orders in the second and third quarters of 2011. That actually reflects a normal seasonal trend for the company.

Second, the units ordered nearly tripled from the fourth quarter of 2011 to the first quarter of 2012. That increase is extraordinary. Sturm, Ruger attributes the huge jump largely to "political and economic factors." We'll look more closely at that later.

Third, orders dropped precipitously in second quarter of this year. Why? Sturm, Ruger quit accepting new orders on March 21 because of the overwhelming volume received in first quarter. The company didn't resume taking new orders until May 29. Despite this order suspension, orders received during the quarter still exceeded the same quarter in 2011 by 10%.

The current backlog is nearly three-quarters as large as the total number of orders received in all of 2011. And the orders are non-cancelable. If the company doesn't receive a single order for the rest of the year, it could still ship 64% more product in the next two quarters than the same period last year -- just by working down the backlog.

Bear
As mentioned earlier, Sturm, Ruger largely credits "political and economic factors" for its strong order growth. Translation: gun sales rose so quickly because current and prospective gun owners were afraid Barack Obama would be reelected. The assumption is that Obama's re-election could result in tighter gun control laws and courts more sympathetic to restrictions on gun ownership.

The main bearish argument against Sturm, Ruger, therefore, is that former Massachusetts governor Mitt Romney has a good shot of winning the presidency in November and shares will drop as a result of millions of American gun owners slowing down their gun purchases. How likely is this scenario?

The most recent Rasmussin tracking poll of likely voters shows Romney with a 2-point lead. The latest Gallup tracking poll of registered voters shows Obama with a 2-point lead. It's a close race.

According to a recent CNBC report, Morgan Stanley's Adam Parker thinks that the markets are pricing in a Romney win. Parker concludes that investors expect that a Romney administration is now likely and think that it will usher in a more business-friendly environment.

If you're bearish on these grounds, you might have some ammunition.

$2 pistol?
Can we settle the bull vs. bear argument by looking at valuation? Probably not.

Sturm, Ruger trades at a trailing P/E of 16.7 and a forward P/E of 16.1; not too far off from other companies that benefit from gun sales, including Cabela's (NYSE: CAB  ) and Dick's Sporting Goods (NYSE: DKS  ) . Cabela's has a trailing P/E of 20.2 and a forward multiple of 15.3, while Dick's trades at somewhat higher trailing and forward multiples of 22.6 and 17.7, respectively.

Rival gunmaker Smith & Wesson (Nasdaq: SWHC  ) has a loftier trailing P/E of 39.9 but its forward multiple of 12.8 is lower. However, Smith & Wesson has grown much more slowly than Sturm, Ruger over the last year.

Sturm, Ruger isn't the most expensive hired gun in town. But it's not cheap as a $2 pistol.

Reloading time
Trading Sturm, Ruger seems too speculative to me. Who really knows for sure which candidate will win in November? And who knows what impact the election will actually have on gun sales?

Investing in Sturm, Ruger, on the other hand, makes sense. The number of Americans who own guns is at the highest levels in nearly two decades. Public support for personal gun rights hit the highest level on record in 2011, according to Gallup.

Sturm, Ruger seems well-positioned to continue to profit from these trends. With the recent sell-off after the company's great earnings numbers, it sure looks like time to reload on this solid stock.

There are other stocks whose fortunes rest on the outcome of the November elections. To learn about some of them, check out The Motley Fool's free report: "These Stocks Could Skyrocket After the 2012 Presidential Election." Get your free copy now.

Fool contributor Keith Speights owns no shares in the stocks mentioned above. The Motley Fool owns shares of Dick's Sporting Goods. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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