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Better Buy: American Outdoor Brands, Ruger, or Axon?

By Travis Hoium – Oct 7, 2017 at 11:48AM

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These three makers of guns, body cameras and tasers have all suffered share price declines this year.

Guns and tasers are both big sellers to law enforcement agencies and consumers, but their manufacturers' stocks have very different qualities for investors. Gun sales are extremely cyclical. They rise when Democrats are in national office or after unusually publicized mass shootings take place, and fall when Republicans have control of the gun control discussion. 

Investors looking at American Outdoor Brands (SWBI 2.01%), Sturm, Ruger & Co. (RGR -0.40%), and Axon Enterprise (AXON 1.03%) need to factor those dynamics into the equation. So, which stock is the best option to buy today? 

Officer putting a body camera back in its dock after a shift.

Image source: Axon Enterprise.

Gun sales are down big in 2017

Background checks associated with gun sales are on pace for an 11% decline in 2017, a clear demonstration of how the political environment affects gun sales. With Republicans in control of the White House for the next three years, there's no chance that either gun control legislation or enhanced regulations from the executive branch will impede people's ability to purchase weapons. Ironically, it's the threat of such restrictions that puts the greatest spur to gun sales. 

Guns aren't the only thing American Outdoor Brands sells, something it's trying to emphasize by changing its name from Smith & Wesson late last year. But in fiscal 2017 86% of sales came from the firearm segment, so gun sales are really what drives the company. Nearly all of Ruger's sales are from firearms and related products. 

On the other hand, citizens and law enforcement agencies alike are demanding that police use less-lethal weapons like tasers, and also demanding that the wear body cameras as a deterrent against the abuse of their power. Those global trends are driving consistent growth for Axon's two major business segments. And with scrutiny on law enforcement rising, it's likely that growth will continue. 

In simply comparing the products they sell, I think Axon is in a much better position than American Outdoor or Sturm, Ruger & Co. That strength shows up in financial results as well. 

Growth favors Axon

If 2017 is an unusually weak year for gun sales due to the political environment, one could rightly assume that they would have been stronger over the four years prior, under an administration that was pushing for tougher gun regulation. But Axon outgrew both of its gun rivals over that period too

AOBC Revenue (TTM) Chart

AOBC Revenue (TTM) data by YCharts

This shows just how strong Axon's business is right now. With momentum strong in the body camera market, it's likely Axon's growth will continue for the foreseeable future, while gun sales are currently going in the opposite direction. 

Gun stocks could be a value play

While sales trends and growth favor Axon over American Outdoor and Sturm, Ruger & Co. right now, investors are paying for that growth. Shares trade at a lofty 4.1 times sales, which assumes growth will continue long into the future. 

AOBC PS Ratio (TTM) Chart

AOBC PS Ratio (TTM) data by YCharts

I think Axon can continue to grow with $446.1 million in future contracted revenue, but valuation is certainly a risk. 

I will also note that price to earnings ratios also currently favor gun makers. American Outdoor's P/E ratio is 7.2 right now, Sturm, Ruger & Co. trades for 13.5 times earnings, and Axon's P/E ratio is 74. Those are backward looking ratios, but you can see that investors are paying a premium for Axon's growth. 

The stock built for the future

Axon's dominance in the stun gun and body camera markets positions it to be a great investment over the long term. The company has also been investing in R&D which will drive its next generation of products, and sales networks around the world that will expand its markets.

Meanwhile, gun sales are struggling, and may not rebound for a few years. There don't seem to be any big growth drivers for the industry while Republicans control the White House and Congress. 

Given their positions in the market, I think Axon is the best of these three stocks. And I would argue it's one of the best stocks on the market today

Travis Hoium owns shares of Axon Enterprise. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a disclosure policy.

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