It's "Interns Ask" week on Industry Focus! On this consumer goods episode, Vincent Shen and special guest Minashsha Lamisa take a big picture look at the gun industry and how companies in this space are affected by tragedies like the mass shooting in Orlando.
They break down the surging demand that accompanies renewed calls for gun control and key metrics for investors to follow, before moving onto ethical investing and the smart gun opportunity.
A full transcript follows the video.
This podcast was recorded on June 21, 2016.
Vincent Shen: This episode of Industry Focus is brought to you by Casper, an online retailer of premium mattresses for a fraction of the price. Because everyone deserves a great night's sleep, get $50 off any mattress purchase by visiting casper.com/fool and enter promo code "FOOL".
Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It is Tuesday, June 21st, and I'm your host, Vincent Shen here to talk consumer retail with a very special guest.
The theme of Industry Focus this week is Interns Ask. Summer had its official start yesterday, so something exciting at the Fool headquarters that accompanies the season is, of course, our summer interns, who actually had their first day, I think, at the very beginning of the month. The Industry Focus crew reached out to them and gave them the opportunity to ask questions about investing, companies, industries, anything that we could really talk about and walk through on the show together. So I'm very happy to introduce our special guest and intern, Minashsha Lamisa. How are you doing?
Minashsha Lamisa: I'm doing great, Vincent, how are you?
Shen: I'm doing very well. Let's put the announcement out there that this is your first time on a podcast.
Lamisa: It is.
Shen: Feeling the jitters a little bit?
Lamisa: A little bit, but I'm super excited to be here.
Shen: I'll put it out there that Minashsha and I spoke before the show, we put some prep into this question that we're going to do a deep dive into, and I think we have a really interesting discussion ahead of us that lays out this industry. But before we get started, why don't you tell us a little bit about yourself? Where you're from, and how your experiences has been so far at the Fool?
Lamisa: Sure. I'm originally from Bangladesh, but I go to school in Berea College in Kentucky. I'm working with the international team right now, and I've been pretty much primarily working for global markets research. It's been really great so far. This company has done a great job welcoming us and treating us and also spoiling us. I look forward to many more great experiences here.
Shen: Awesome. You guys finish up at the end of July, right?
Lamisa: Yes, July 31st.
Shen: So you're about at the halfway point.
Shen: Okay. I'm glad it's been a good experience for you so far. Diving right into it, why don't we start off with the question that you had, and the one I ended up picking so we can really talk about on the show?
Lamisa: For sure. My question was: "What are the potential effects of the recent Orlando tragedy on the gun industry?" But, I'm actually curious about how the unfortunate events like mass shootings affect the gun industry in general. But I think before we deep dive into it, it's good for us to talk a little bit about who exactly is the gun industry, and how big it is.
Shen: I'm glad you mentioned that. With that question, obviously, there's a lot of politics, it's a very divisive issue. Trying to approach this from more of a neutral angle, the investing angle, if we look at this industry and who's in it, that's going to give us a much better idea of what some of the impacts will be. I think, overall, we're probably going to focus on the consumer-facing side of the business, not so much the military contractors and suppliers, because frankly, those are much bigger companies operating in a much bigger space. On past episodes, we tended to focus on some of the producers and manufacturers of the rifles and pistols, ammunition. But I think we neglected the retail-facing side, which encompasses not only your mom-and-pop gun store, but also some of the larger chain stores that focus on what you might call outdoors, or hunting, and that kind of customer segments.
In terms of the size of the industry -- we know a little bit about who are we talking about but also the size -- for the former category -- think about the gun and ammo manufacturers -- according to IBISWorld research, the sector generates about $13.5 billion in annual sales in the U.S. They manufactured over 9 million firearms in 2014, and that production number has actually tripled from just 3 million in 2004. A lot of growth for the sector in the past decade or so. On the retail side -- here's some surprising numbers -- I'm going to ask you a question. How many gun stores do you think there are in the United States?
Shen: That's actually a pretty solid guess. I have some numbers, and it's not always clear sometimes with the metrics they use in this industry. It's not always a one-for-one comparison. But the ultimate idea is, the Bureau of Alcohol, Tobacco and Firearms put the number of licensed gun dealers in the U.S. at about 65,000. Which is huge. If you make a comparison to other really prolific companies that have a lot of location, think like a Starbucks -- there's always the idea that there's one on every corner -- or McDonald's, those only have around 12,500 or about 14,000 locations. There's also been comments made that there's essentially more gun stores than there are grocery stores in this country. But that 65,000 number isn't exactly representative, because not every single one of those is an actual storefront that's actively dealing in guns; a lot of them might be like people who are in the industry who, for example, gunsmiths and things along those lines, that don't actually sell firearms.
Some of the players now that we're going to discuss ... Do you know any of these names that are active in this industry?
Lamisa: Yeah. First of all, I have to say, I could never imagine that there were 65,000. Even when I said 20,000, I thought I was over-estimating. That's a mind-blowing number. I know there are a lot of small privately owned gun manufacturing companies, but I believe there are only two public companies that we usually tend to hear about. There's Smith & Wesson (NASDAQ:AOBC) and Sturm, Ruger (NYSE:RGR). Am I wrong, am I right?
Shen: You got it. That's the thing here. In this sector -- and this sometimes limits our coverage on it -- of all those dealers that we mentioned, a lot of these mom-and-pop gun stores aren't publicly traded, it's hard to access them. And then, on the manufacturing side, also, you have the two companies you mentioned, Smith & Wesson and Sturm, Ruger, and you also have a few others Vista Outdoor. But a lot of these companies might sell firearms, especially the bigger chains, like a Walmart, for example. But that's such a small part of their business, and I don't think it's nearly as comparable to include them when we're talking about this. For more pure play companies, those are the ones we're thinking about. Admittedly, Smith & Wesson and Sturm, Ruger actually, by manufacturing volume, are the two biggest producers year to year in the industry. At least we're looking at the two biggest names in that regard.
If you're curious to hear about Smith & Wesson's individual size, they recently reported their fiscal 2016 results with about $723 million in sales, firearms making about 90% of that number. Sturm, Ruger had trailing 12-month revenue of about $587 million. Again, size, those are bigger companies in the space, but it gives you a sense, in my opinion, of the fact that it's a very competitive industry. There's a lot of big players like these companies, but also tons of smaller ones that are privately owned. I wouldn't say that any single company has that dominant market share that you might typically see in other sectors within consumer retail. But at the same time, among the dealers and retailers themselves, the more consumer-facing side, it's very competitive and fragmented.
Cabela's -- which would be considered one of the bigger chains that sells a lot of firearms -- their hunting equipment category, which includes guns, ammo, archery products, and some accessories, made up about 45% of their merchandise sales, or about $1.6 billion in revenue last year. At Dick's, their hardlines category head over $3 billion in sales for fiscal 2015, but that's not exactly clear. Again, the numbers include other things and aren't as relevant. That number includes all sporting goods, fitness equipment, and anything that you would get equipment-wise for sports. So that just muddies up the numbers a little bit.
Lamisa: That's great. Going back to my original question, now I'm really curious now that I have a bigger idea of what the industry looks like, I'm curious about, what are the factors that drive the industry?
Shen: Sure. We have a picture painted of how big it is, who some of the players are, just to give you a sense of that environment. But in terms of the factors -- and this is where we get into more the politics, but also the fact that they do have a very real impact on how these companies will fare, especially with surges in demand. When you have, for instance, like this specific tragedy recently in Orlando, you often see a short-term impact in demand, as a lot of the news will frankly scare the public. A lot of people, on one hand, might turn to firearms protection, because they see this and they think there's an increase in crime, and they need to be more responsible for their own safety. They just have it on their mind, and they might turn to this, and that results in a short-term surge in demand.
At the same time, on the political side, we've seen this recently during most of the presidential election campaigns -- gun control has become a very big issue that's at the forefront for some of these candidates. Again, that's coming off of what happened in Orlando, we have, again, this more short-term to mid-term impact that often follows. We'll see how that becomes a bit cyclical, it as has happened in the past. I'd say, really, it's the politics that have a bigger impact on the market dynamics.
Following what happened, for example, at Sandy Hook in 2012, there was a major push then, similar to now, for new gun control laws. I think it's an analogy, that you can see now that we have the data, we have the numbers, how big those surges can be, and how the companies will try to adjust to meet that demand. In December of 2012, in the month of the shooting, checks went up 50%. That was just in the last two weeks of the month. That ended up kicking off a six-month buying spree, where background checks were up 30% above the same period the previous year, so huge surge in demand.
How does that impact the companies themselves? The production values were up for both Sturm, Ruger and Smith & Wesson, up over 30% in 2013, trying to meet this surge. And then, Smith & Wesson's sales specifically went up almost 40% for that fiscal quarter that ended in January after what happened. Sturm, Ruger sales went up 50% for their holiday quarters. You can see these are very significant impacts that they have. If you're looking at those companies, you can look at what their profits have been, what their revenue has been.
If you're trying to look more broadly at the industry, there's a few numbers that are important for listeners and people who are potentially thinking about investing in this industry need to know. That's the NICS background checks, which, a lot of people, I think, would consider to be the closest proxy for sales. They're not perfect one-to-one. There's a lot of little things that can throw the numbers off. But overall, if you look at them on a trend basis, it can be very telling. Also, there's the manufacturing data from the ATF, and you can see exactly how many firearms are produced by each of these companies. Not just the publicly traded ones, but any company that is in the purview of the ATF, you can see the market share by volume, which is very interesting.
With NICS checks, and with the current presidential election -- which I would argue has even more of a mid- to long-term impact on demand. This year has added to a bit of the chaos as guns have become that big issue. We have 13 months in a row of year-over-year increases in checks from the NICS. And those 13 months, even more incredibly so, have all been for their month essentially record-setting, all-time highs. So clearly right now, with the combination of what's going on in the news and what's going on in Washington D.C. here local to us, it's really pushing people to, similar to what happened in 2012, but even to a higher level, to stock up. People who are concerned that there might be certain guns they can't buy in the future, really going to the stores now and getting what they can before what they fear as potential new regulations coming down the line.
In terms of my own personal calculations coming through have the NLCS background check data through May for 2016. Based on averages for how much that period generally represents per year, annualizing it out, we're going to see potentially up to 28 million checks for 2016. That's well above what was a record-setting year for 2015, which was about 23 million checks. So it seems like year after year, we're setting these new records. Like I said, it's not a perfect proxy for what gun sales are, but it gives you an idea of how much the industry is growing overall.
The last thing I wanted to touch on for the investor side is the fact that, since the beginning of 2009, which is when President Obama started his eight-year term, which is closing out soon, Smith & Wesson and Sturm, Ruger stocks have traded up around 800%, while the S&P 500 has only been up around 130%. Again, regardless of what your stance is on the politics, or this issue overall, as divisive as it is, these companies, you have to think about how these play into their businesses, because it has a very real effect. For the past decade or so for these companies, they've definitely benefited from the increased demand.
I know you had a few more questions around developments in terms of, not only how we're thinking about safety in the industry, but also some things with ethical investing. But before we move on, this episode of Industry Focus is brought to you by Casper. I've always been a big believer in the advice that you should spend wisely on the things that keep you on the ground -- your shoes, your tires, and your mattress. Considering how much I value my shut-eye, I used to assume that I would need to spend thousands of dollars for a proper night's sleep. But Casper is revolutionizing the mattress industry by cutting out the cost of dealing with retailers and showrooms, and passing those savings directly to the consumer. Their mattresses are obsessively engineered, combining spring latex foam and supportive memory foam to create an award-winning sleep surface, all offered at very fair prices that you can buy online risk-free. So, instead of being forced to make a major purchase after you lay down for maybe 30 seconds in a showroom, Casper understands the importance of really giving your mattress a test run, with free delivery and painless returns within a 100-day period, which is only fair if you plan to spend a third of your life on what you're about to buy. You can save an additional $50 toward a mattress purchase by going to casper.com/fool and entering the promo code "FOOL". Terms and conditions apply.
Going to those follow-up questions, what do you think so far from what you've seen about smart guns, ethical investing, those things
Lamisa: When I was looking into the effects of the Orlando mass shooting on the gun industry, I was particularly curious about ethical investing, because I know ethical investing is a much bigger thing now than it was 10 years ago, and people put a lot more thought into buying stocks than they did before, on what the company is really looking at. So I'm curious how ethical investing affects the gun industry. Do people take their money out of these industries because they're afraid that it's going to negatively impact the society? Or do they not? Or does it have very little impact?
Shen: I think, in the consumer and retail space especially, because a lot of these companies will produce products that you see very often in your household -- household names -- there's definitely been more of a push in the last 10 years, I'd say, where people can think about these companies and making sure that they're investing in ones that represent their values. I don't think it's necessarily the primary driver for most investors, but it's something that factors into their investing decisions, like you mentioned. I think, overall, there has definitely been a push from some gun control advocates for certain asset management companies, investment managers, to move away from gun stocks, because they view it as not fitting with their ethics. Also, trying to remove them from certain investment funds, and things along those lines. But overall, I think it's a personal decision for you, if you were thinking about this, whether or not you want to invest in companies like these gun makers, or even tobacco companies or alcohol companies, which are traditionally called sin stocks.
But ultimately, I don't think it goes beyond much more of that personal decision. We're not seeing a mass exodus, for example, from these companies because people are having issues with this. Ultimately, it's with about, I think, almost half of households in the countries usually having at last one firearm, so it's clearly not this super clear-cut issue where people overwhelmingly swing one way and move away from the industry. I think it's much more of a personal decision.
Then, something else you had mentioned to me in terms of the curiosity you had about the developments in the space, with smart gun technology, it's interesting to see, in the beginning of the year, President Obama announced some efforts to dedicate more federal resources to smart gun research. He noted with this quote, "We me to develop new technologies that make guns safer. If we can set it up so you can't unlock your phone unless you have the right fingerprint, why can't we do the same thing for guns?" So here, what do you think about that overall sentiment?
Lamisa: I think, from the post of President Obama, I could only imagine that people would be willing to put more money in the stocks of these companies. If they're concerned about security, this is something that's definitely going to be put in to work for the companies, to be putting in these security measures. But I'm really curious why this has not taken off yet.
Shen: On the one hand, you can look at it as a huge opportunity. Here is something that the presidential administration is really pushing for. You can almost see it as an opportunity for innovation in the industry, and potentially push people who were previously fearful or on the fence with guns to say, "Oh, OK. If it has these added safety measures, it might be a new market that some of these companies -- that we mentioned -- can access." But I think the problem right now is, the technology doesn't always mix that well. Breaking it down to how it works, currently, most of the smart guns that you will see use some type of RFID radio technology. So you have a ring, for example, with the iGun. It's a shotgun. You have the ring on, and it connects with the censor with the firearm, basically identifying each other. Then the gun will fire. There's another one that is from Germany, I think it's called Armatix iP1, that uses a watch.
The concept is sound. The idea being, especially if you're a police officer, you don't want your firearm to be used against you. The idea can be that this will prevent accidents and things like that as well. But I think the problem is, even as much as a lot of people in the U.S., consumers, have really heartily adopted things like smartphones and wearables, it doesn't exactly fit with what gun buyers value, which is often reliability. The issue is, you can take those electronics and put them in a smartphone, and they can work relatively reliably, though I've had friends who have use the fingerprint scanner on their Apple iPhones, for example, who have complained that it really doesn't work all the time for them. It might take five or six tries, for example. But your cellphone, you generally take pretty good care of it. Whereas, every single time you fire a gun, you are containing a small explosion. It's very violent. Combining that with the delicate electronics, for example, has resulted in some issues.
This technology isn't all that new, either. Even in the early 90s, gun companies started thinking about the opportunity here. There's actually a story that set off a cold phase where companies realized it might not actually be as popular, or this might not actually see the mass adoption that we think it will -- which is when Colt had major financial struggles in the 90s, and they were taken over by an industry outsider, someone who's not really familiar with the firearms industry. He decided to make a push, and invested a lot of money, millions of dollars, staking a bit of Colt's future on this idea that they could create a pistol that works similar to Armatix, with a wristband. They needed to be within a certain distance from each other in order for the gun to operate and fire.
They thought they had this prototype working really well. Everything looked good. But he was still getting a lot of pressure from both the firearm industry side that said: "No, we're not interested in this" or "We're concerned that once it becomes available, it will be the only thing that's available." And on the more gun control side, they were saying: "This isn't a good idea because we're trying to get rid of guns entirely." So he was getting pressure from both sides. But he invited a Wall Street reporter to the facilities in Connecticut to demonstrate this and hopefully get some good press for them. The moment comes, the reporter is sitting there, they take the gun out, put the wristband on to demonstrate, and when they try to fire, it fails. This was documented quite clearly in the resulting report in the Wall Street Journal. And I think that really set off this period where, look at this company, Colt. A really big brand name within the industry. And they spent millions on this, and it blew up in their face, actually.
I don't think, with the smart gun technology, it is that crystal clear, that this is obviously something that will work. But at the same time, I don't think anyone can argue the fact that it's worth some research, and it is an opportunity if these companies like Smith & Wesson or Sturm, Ruger approach it in the right way potentially in the future. If we can have a decent conversation about it nationally, it's basically an opportunity for them to access certain consumers who otherwise wouldn't consider it, and hopefully increase safety and reduce accidents, for example.
Otherwise, I want to open up the floor to you in case you have any other questions. But I hope that answers a little bit of what you mentioned what the original prompt that started this whole conversation of what this industry is and how certain events like what happened in Orlando can affect things.
Lamisa: Yeah. I want to thank you, Vincent, for making it really clear to me what the gun industry looks like. I think I came in with the idea about ethical investing, but now I'm much more aware of the trends of the gun industry, and what really goes behind consumer behavior when they're purchasing guns, and also gun stocks. Thank you!
Shen: To go off of that too, you mentioned understanding what the industry is like and the consumers. I know right now, during school, you probably don't have that much money set aside to be pouring into the stock market. At the same time, the idea is that before you start investing, before you start putting money into these stocks, you want to know the industry. That means not just who the companies are -- that we covered -- who the market leaders might be -- but also understanding what some of the consumers that are buying the products made in that industry are focused on, what is a priority to them. And also some of the non -- I wouldn't say as business focused drivers -- the macro-elements like politics, for example, which have a very strong impact and are very much correlated with the results for this industry.
No pressure here, I'm actually kind of curious, what do you think? Would you potentially look into investing in this industry?
Lamisa: I think I would, just because there's an opportunity for technological innovation in this industry, especially with all the political pushes, and also with all the unfortunate events, which kind of makes society think about whether those pushes are required or not. I think there's a big opportunity for this industry. As an investor, I think I would invest in the gun stocks because of that potential opportunity in the future.
Shen: Cool. It seems like you have a little bit of a more bullish take on it, but of course, you have to do your research, like we always recommend here. But, I'm really glad that you're able to join me. I hope the second half of your internship here is as fun as the first half has been.
Lamisa: For sure.
Shen: That wraps up our discussion for today. You can continue the conversation with us via Twitter @MFIndustryFocus, or send us any questions or comments via email at IndustryFocus@Fool.com. You can also enjoy the other great podcasts from The Motley Fool by checking out fool.com/podcast. People on the program may own companies discussed in the show and the Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thanks for listening and Fool on!