Please ensure Javascript is enabled for purposes of website accessibility

Why Is the Market Ignoring the Fact That Gun Sales Are Booming?

By Rich Duprey - May 10, 2017 at 10:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Wall Street is looking at the data the wrong way.

Just because gun sales aren't booming at the same rate they were during the biggest year ever for firearms manufacturers, that doesn't mean they're not still rising. Yet the way the market responded to the FBI release of April gun buyer background-check data, you'd think we were in the midst of a major downturn.

The fact is, gun sales are surging, and when American Outdoor Brands (SWBI 14.49%) and Sturm, Ruger (RGR 2.72%) report earnings for the current quarter, it's likely Wall Street will respond with shock and surprise at how strong demand was.

A woman takes target practice at a gun range.

Image source: Getty Images.

Boom times

The federal law-enforcement agency says it processed more than 2 million background checks through its National Instant Criminal Background Check System in April, some 16% lower than it did in March and down 5% from the year-ago period. At first glance, it seems reasonable to say the market was right to drop the stocks of Smith & Wesson's owner and Ruger. But taking superficial readings leads to the wrong conclusion, as it has in this instance.

As noted, 2016 was the biggest year for gun sales. The FBI processed more than 27.5 million background checks last year, 19% more than it had the year before and more than double the number it did a decade ago.

American Outdoor's fiscal third quarter, which ended Jan. 31, showed that firearms sales over the nine-month period jumped 30% from the prior year, with 25% more handguns shipped and 68% more rifles. Similarly, Ruger, whose fiscal year runs parallel to the calendar year, reported that firearms revenues rose 21% for the year to $658 million. Even ammunition makers such as Olin (OLN 3.00%), which manufactures the Winchester brand, saw revenue rise last year, albeit at a lower 3% rate, though that was mostly due to lower sales to the military and to industrial customers.

Gun sales (and, to a lesser extent, ammo sales) were mostly driven by political considerations, as many gun owners and enthusiasts anticipated a different outcome in the presidential elections last November. When Donald Trump came out on top, the threat of new gun control legislation was largely removed from the table, and the need to buy a gun right away before new laws were enacted waned.

But it didn't eliminate the demand for new guns; it just deferred them. Gun control doesn't really affect demand, only the timing of the purchase, typically pulling forward sales that would occur anyway. And that's what we're seeing with the FBI's numbers so far in 2017.

A different benchmark

If you compare April's FBI background check numbers with those of 2015, what you see is that background checks are running 20% above that level, and if you check back on every month so far this year, you see the same thing. Over the first four months of 2017, the FBI has processed over 8.7 million background investigations of potential gun buyers, 19% more than the 7.3 million it conducted two years ago.A chart showing year-to-date background investigations from 1999 to present and comparing it to the trendline

Data source: FBI. Chart by author.

The trend of gun buying still remains ever higher, and though it's not as high as the biggest year ever for the industry, it shouldn't be expected to maintain that pace. Last year should rightly be seen as an outlier and not the benchmark. 

A better ruler to measure the health of the industry might be to take the two-year average of FBI NICS investigations, and there we see that so far this year, gun buyer demand is running about 8% higher than it was last year.

Chart showing two-year average for monthly background checks between January and April from 2015 to 2017

Data source: FBI. Chart by author.

All of this says the market's knocking down the stocks of American Outdoor Brands and Sturm, Ruger makes them very attractively priced at these levels. Eventually the market will come to its senses and realize that it's been looking at the data all wrong, at which time the gunmakers will be set for a major upgrade.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
SWBI
$16.44 (14.49%) $2.08
Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
RGR
$66.06 (2.72%) $1.75
Olin Corporation Stock Quote
Olin Corporation
OLN
$46.66 (3.00%) $1.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.