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Why American Outdoor Brands and Sturm, Ruger Stocks Got Rocked Today

By Rich Smith - Jun 30, 2017 at 4:01PM

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American Outdoor Brands reported earnings, and something other than hilarity ensued.

What happened

Shares of gunsmiths American Outdoor Brands (SWBI -2.68%) and Sturm, Ruger (RGR -0.91%) both sank nearly 10% in early trading Friday, and their distant rival Vista Outdoor (VSTO -3.11%) sank about 4% as well. All three stocks have recovered somewhat, but as of 1:30 p.m. EDT, Sturm, Ruger stock was still down 7.2%, American Outdoor 4%, and Vista 2%.

So what

Call it collateral damage. On Thursday, American Outdoor Brands reported its fiscal Q4 and full-year earnings, which at first glance looked like good news.

For its fiscal fourth quarter, American Outdoor reported GAAP profits of $0.50 per share, and pro forma profits of $0.57. It's never 100% clear which of those numbers Wall Street intends to be predicting when setting its earnings expectations -- but in this case, it doesn't matter. Whether $0.50 or $0.57, American Outdoor's earnings easily met the Street's expectation of a $0.38 per share profit.

Likewise, revenues handily bested expectations for the quarter.

A close-up of a golden pistol.

All of a sudden, gun stocks aren't looking golden. Image source: Getty Images.

Now what

But if that's true, then why is American Outdoor Brands stock down? And why does it seem to be taking the stocks of Sturm, Ruger and Vista Outdoor down with it?

In a word: guidance.

In addition to reporting on what it actually did last quarter and last year, American Outdoor Brands also gave new guidance on what it expects to do this year, and that news isn't nearly so good. For fiscal Q1 2018 (now in progress) American Outdoor Brands said it expects to earn no more than $0.06 per share, and perhaps as little as just $0.01, GAAP. For the full year, the company expects to book between $750 million and $790 million in sales, but earn only somewhere between $1.16 and $1.36 thereon.

Taken at the midpoint, this implies a 44% decline in per-share profits from the $2.25 earned this year. It also suggests that American Outdoor Brands is likely to miss Wall Street estimates for fiscal year 2018.

The reason is that after patting itself on the back for achieving "record level revenue" in 2017, management didn't go into any specifics on why it expects to earn so much below record levels of profit in 2018. Regardless, the size of the projected decline suggests that there's something not entirely good going on in the dynamics of the weapons market right now.

Worse, American Outdoor's suggestion that it might earn as little as a penny a share in Q1 -- a quarter that's now two-thirds complete -- has to be considered as an accurate and well-informed reflection of the way things are going in the market right now. For American Outdoor Brands, and for rivals Sturm, Ruger and Vista Outdoor, which must play in this same market and be affected by the same trends, that's a disturbing prediction.

Investors are reacting accordingly -- and probably rightly -- by exiting.

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Stocks Mentioned

Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
RGR
$63.47 (-0.91%) $0.58
Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
SWBI
$13.81 (-2.68%) $0.38
Vista Outdoor Inc. Stock Quote
Vista Outdoor Inc.
VSTO
$28.64 (-3.11%) $0.92

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

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