Better Buy: Sturm, Ruger & Co. vs. American Outdoor Brands

The companies behind Smith & Wesson and Ruger guns square off in this stock duel.

Dan Caplinger
Dan Caplinger
Jan 31, 2017 at 9:42AM
Consumer Goods

The victory of President Donald Trump stunned many investors, and few industries saw as big a reaction as the gun sector. Sturm, Ruger (NYSE:RGR) and Smith & Wesson maker American Outdoor Brands (NASDAQ:AOBC) had performed well going into the election, and investors had expected that a Democratic victory would put more pressure on lawmakers to pass gun control laws that would in turn have spurred panic-buying among gun enthusiasts. With that threat effectively gone, both Sturm, Ruger and American Outdoor Brands sputtered into 2017. Now, value investors want to know which stock would make a better choice for those who believe the future looks bright for the industry. Let's look more closely at Sturm, Ruger and American Outdoor Brands now to see which looks more attractive right now.

Smith & Wesson ad with silver and black pistol.

Image source: American Outdoor Brands.

Valuation and stock performance

Sturm, Ruger and American Outdoor Brands have both seen declines over the past year. Since January 2016, Sturm, Ruger has posted a nearly 10% drop, compared to a smaller 5% decline for American Outdoor Brands.

Given their declines, it's not surprising to see both stocks trading at relatively low valuations compared to their respective earnings. American Outdoor Brands currently has an earnings multiple of less than nine, when you look at its trailing earnings over the past year. Ruger weighs in with a slightly higher price-to-earnings ratio of 12. When you bring in forward earnings expectations, Ruger's multiple rises to 14, while American Outdoor Brands stays around nine. Based on those figures, American Outdoor Brands has the edge.

Dividends and return of capital

If you want a stock that pays dividends, then only Sturm, Ruger gives you what you need. Ruger has a variable dividend that hinges on earnings, and over the past 12 months, it has paid out $1.73 per share in total payments to shareholders. Its most recent $0.41 per share quarterly payout was $0.08 less than it had paid the previous quarter, but it was up sharply from the $0.25 per share Ruger had paid in the same quarter of 2015. By contrast, American Outdoor Brands pays no dividend.

Sometimes, stock repurchases can make up for a lack of dividends. However, neither company has used repurchases in the past 12 months either. For those who value return of capital to shareholders, Ruger is the only choice.

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Growth and risk factors

Both Sturm, Ruger and American Outdoor Brands have growth opportunities as well as risks. For Ruger, demand has been strong, and in its most recent quarterly report, the company said that it saw revenue jump by a third, pushing net income per share up by two-thirds. As the sole remaining pure play on guns, Ruger is attractive to those who believe that the gun market will remain strong irrespective of there being a gun-friendly president in the White House. Yet the coming quarter should give a good read on how much of Ruger's recent success came from those expecting the election to turn out differently. If gun buyers seem satisfied with their current holdings, then Ruger's sales and profits could fall in 2017.

American Outdoor Brands has seen the same fears, which is part of what motivated its decision to give up the Smith & Wesson name and adopt a more diversified approach to its business. The company has seen success in the rifle and pistol areas, but it is also looking squarely at other areas. The company created a new outdoor recreation division, with products aimed not only at hunters but also at camping, hiking, and fishing. In addition, American Outdoor Brands will provide additional items for gun-owners beyond the weapons themselves, such as optics and gun safes. The company is enthusiastic about its prospects, and even with the change, guns will still make up a huge part of its overall business.

Right now, Ruger has a cheaper valuation and higher dividends, giving it the edge over American Outdoor Brands. Yet if gun sales do indeed fall, then American Outdoor Brands' moves to diversify itself could pay off in outperformance.