This article was updated originally published on June 15, 2015 and updated on February 6, 2017.
Do you love guns? Would you love to own a gun stock?
I've been investing in the stock market for about two decades now. Here at The Motley Fool, I've been writing about investing, trying to help others learn how to do it, for more than a decade. And for as long as I can remember in either capacity -- investor or investing writer -- there have been exactly two stocks to watch for investors interested in guns: "Smith & Wesson," now known as American Outdoor Brands (NASDAQ:AOBC) and Sturm, Ruger (NYSE:RGR). That was it. Finis.
Times change, however, and today, we've got three gun stocks to watch. But before I tell you about our mysterious third firearms candidate, let's cover the usual suspects, beginning with...
American Outdoor Brands
The market for firearms is highly fragmented, with many names -- Glock, Colt, Beretta -- privately owned, located abroad, or both. This can making investing in guns tricky. One of the easiest ways for an investor to gain exposure to this market, though, is through buying shares of industry leader American Outdoor Brands.
Boasting a 19% share of the $2.2 billion market for "domestic non-military... handguns" and a 5% share of the $1.5 billion market for domestic non-military "long guns, excluding shotguns," American Outdoor Brands appears to be the gun maker with the biggest market share across the board.
As for its stock, a share of American Outdoor Brands will set you back about $21 today -- roughly 9 times earnings. The stock pays no dividend, but is growing earnings at 14% annually. As such, it appears undervalued for its growth prospects, with a PEG ratio of 0.6.
Unlike its publicly traded archrival, Sturm, Ruger does not publicly claim any particular market share (at least, it discloses none in its 10-K filings with the SEC). That said, if we take American Outdoor Brands' estimates of market sizes as a given, then the $305.5 million in revenue that Ruger collected from sales of pistols and revolvers (collectively, "handguns") in 2015, and the $208.5 million it took in from rifle sales, imply Ruger has a 14% share of both markets.
Thus, it appears that Ruger doesn't lag American Outdoor Brands much in the handguns market, and is beating it soundly in long guns. On top of that, Ruger stock is debt-free, cash-rich, and currently pays a 3.3% dividend. If getting a steady income from your investments appeals to you, this alone could make Sturm, Ruger a stock to watch.
Valuation-wise, Sturm, Ruger stock doesn't cost much more than American Outdoor Brands. While its stock price appears much more expensive at $50, that price works out to just 11.5 times trailing earnings. (On the other hand, no analysts have published growth estimates out for Ruger, which complicates the task of saying whether "11.5 times earnings" is cheap, or expensive).
Door No. 3: Vista Outdoor
And now for the stock you've been waiting for. Opening Door No. 3, we find ourselves outdoors -- or more precisely, at Vista Outdoor (NYSE:VSTO).
The culmination of a long series of transactions that began with Alliant TechSystems' acquisition of long guns manufacturer Savage Arms and optics specialist Bushnell Group in 2013, then continued when Alliant merged with Orbital Sciences in 2014, and concluded with a spinoff of the firearms business in 2014, Vista Outdoor has become our third stock to watch when investing in guns.
Vista boasts that it controls "the No. 1 sales position in the U.S. markets for ammunition, riflescopes" and ... golf rangefinders. Vista does not, however, affix any particular percentages to this "No. 1" position. Significantly, neither does it make any claim to being in the running for No. 1 in the manufacture of actual guns.
Valuation-wise, the stock sells for $25 and change. This values Vista Outdoor stock somewhere between American Outdoor Brands and Sturm, Ruger, at a P/E of 11.0. The stock pays no dividend -- a fact that argues in favor of buying Sturm, Ruger over Vista Outdoor. On the other hand, with an earnings growth rate projected at 16%, Vista appears to be the fastest grower of these three stocks.
The upshot for investors
Priced at PEG ratios of only 0.6 and 0.7, based on analyst growth rate estimates published by S&P Global Market Intelligence, American Outdoor Brands stock and Vista Outdoor both appear to be attractively priced today. Sturm, Ruger, on the other hand, may have the highest P/E ratio and the least certain growth rate -- but one thing's for certain: It's the only one of these three stocks that has enough confidence in its earnings power to pay its shareholders a dividend.
Long story short, if you're looking to invest in gun stocks, I think all three of these companies would make for fine investments at today's prices. That said, Sturm, Ruger looks like the best bet for investors seeking a steady income in addition to a cheap stock.