A little-known business of gunmaker Sturm, Ruger is suppressors. It's relatively new to that market, but it has made a lot of noise there nonetheless. Image source: Sturm, Ruger.

And then there was one. Not that there was a lot of choice beforehand, but after Smith & Wesson decided to pursue the rugged outdoors market and change its corporate identity, Sturm, Ruger (RGR -2.15%) remains the only pure-play gun stock you can buy. For investors deciding whether there's still opportunity inherent in firearms, it's worthwhile to see if it makes sense to buy Ruger.

A leading gun manufacturer

The gunmaker may not have a history as old or as storied like rivals Smith & Wesson, Colt, or Remington, but Ruger has still made a name for itself -- and made a mark on the industry since its founding in 1949.

The new Ruger Mark IV pistol. Image source: Sturm, Ruger.

According to the latest data available from the Bureau of Alcohol, Tobacco, Firearms & Explosives, Ruger was the largest gunmaker in the U.S., producing over 1.7 million firearms in 2014, ahead of the 1.4 million made by Remington, and better than the 1.3 million guns made by Smith & Wesson (however, it slips to second place behind Smith & Wesson if we're just talking about handguns).

To put that in perspective, it means almost one of every five guns made that year was a Ruger. However, the data is a bit stale as the firearms industry has just gone through its two biggest years ever. The FBI says it processed over 27.5 million background checks on potential gun buyers in 2016, 19% more than the prior year and almost 32% more than in 2014, so it's quite possible the ranks shifted, but the point is, Sturm, Ruger is one of the premiere gunsmiths today.

It produces everything from pistols and revolvers to rifles and shotguns, and its rimfire handguns and long guns are among the most popular on the market. Its Mark III is one of the top pistols on the market, and its 10/22 semiautomatic rifle, introduced more than 50 years ago, remains an industry leader.

Innovation remains key to growth

While certain guns do stand the test of time, a gunmaker like Ruger is going to have to introduce new product to market if it wants to thrive. Fortunately, Sturm, Ruger has proven particularly adept at doing so successfully. In its third-quarter earnings report last November, the gunslinger said new products like its LC9s pistol and AR-556 modern sporting rifle generated $168 million in revenues for the the first nine months of the year, or 32% of total firearms sales.

Image source: Sturm, Ruger.

Although Ruger anticipates new product revenues will decrease in the coming quarters as it laps the introduction of those guns into the market, it's not standing still. Last September, it introduced its Mark IV pistol, similar to the Mark III, but with a greatly simplified one-button takedown; the LCP II pistol, a major reworking of its popular LCP that was introduced in 2008; and the American Compact pistols, an expansion of the American pistol family it launched two years ago.  

That last one is important because, like the LC9s, it targets the concealed-carry market that seems to dominate gun sales these days. In that vein, Ruger announced at the the National Shooting Sports Foundation's recent SHOT Show gun show that it would begin selling a new 8-shot, .357 Magnum Redhawk revolver. It also unveiled new rifles including the 6mm Creedmoor Precision Rifle and its American Rifle Predator. If these catch on, new product revenues may not fall all that much.

A pro-gun environment

Perhaps the biggest bugaboo for Ruger, or even Smith & Wesson's parent American Outdoor Brands (SWBI -1.16%), is how the market will react to a Donald Trump presidency. Well, we know what the market thinks: It sent shares of Ruger and American Outdoor tumbling after the election because the thought was that gun demand would dry up, causing sales to contract.

That's not necessarily true, though. Black Friday saw the biggest single day ever for the FBI to process background checks, and December's investigations, while lower than the prior year and snapping a 19-month streak of higher numbers of checks, was still the biggest December ever without a mass shooting.

Data source: FBI. Chart by author.

The SHOT Show also had nearly 65,000 attendees this year, making it the second biggest crowd ever, indicating interest for guns has not abated, as analysts seem to think. As Ruger and American Outdoor -- and to a lesser extent, Vista Outdoor (VSTO 0.80%), which owns rifle and shotgun maker Savage Arms -- report their earnings results over the next few quarters, it will give investors a better indication of the true state of the firearms market.

Valuation is paramount

If you buy into the argument that gun demand isn't dropping off a cliff and Ruger's results could provide a surprise, is Ruger's stock worth buying now?

Ruger trades at just 11 times trailing earnings and 13 times next year's estimates, and shares sit 33% below their 52-week high hit last summer. With an enterprise value that trades at a bargain-basement 11 times its free cash flow, it's clear Sturm, Ruger is a deeply discounted stock that is waiting for a simple catalyst to send shares soaring.