Please ensure Javascript is enabled for purposes of website accessibility

Is Sturm, Ruger & Company, Inc. a Buy?

By Rich Duprey – Mar 31, 2018 at 8:01PM

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

One of the leading gunmakers offers a discounted stock and a chance to buy future growth.

If Sturm, Ruger & Company, Inc. (RGR 0.07%) doesn't think its stock is a buy, should you? Although the gunmaker's stock gained 8% in the fourth quarter last year, its shares were still down some 15% from the highs they hit during the summer, and about 20% below their 2016 peak.

Despite their lower price, management did not repurchase any shares during the fourth quarter of 2017. The stock is down 12% year to date as of this writing. Should you consider buying shares?

Ruger Mark IV pistol

Image source: Sturm, Ruger.

A good reason Ruger didn't ...

Last year was something of an anomalous year for Ruger and the firearms industry. Following an extraordinary run up in 2016, sales largely fell off a cliff last year as consumer demand all but dried up. A National Shooting Sports Foundation analysis of adjusted criminal background checks showed them to be down 11% year over year, in large part because of 2016's outsized gains, but also because retailers were trying to adjust their inventories and generate cash, and manufacturers were engaging in significant discounting to drum up sales.

Chart showing adjusted criminal background checks by month

Data source: National Shooting Sports Foundation. Chart by author.

Ruger itself didn't participate in such promotional efforts, and actually rarely does, as it seeks to protect the premium nature of its firearms and its margins. Last year was a tough year, with its gross profits falling 30% and operating profits tumbling 43%. It might not be so surprising that Ruger was conserving its cash instead of engaging in stock buybacks.

Moreover, unlike Smith & Wesson parent American Outdoor Brands (SWBI -0.45%), Ruger pays a dividend to shareholders. However, instead of it being a set rate like you'd find at most other companies that pay a dividend, Ruger fixes its payout as a percentage of its earnings.

Since 2012, it has been at approximately 40% of net income, and last year net income fell to $52 million from $87 million the year before, meaning the cash dividends Ruger paid dropped from $1.73 per share in 2016 to $1.36 per share last year. The payout currently yields 1.9%, which is some 32% lower than a year ago.

RGR Dividend Yield (TTM) Chart

RGR Dividend Yield (TTM) data by YCharts

... but why you might want to

Ruger and Smith & Wesson are two of the premier names in the firearms industry and the two largest gunmakers in the country. There's no argument that the industry is at a low point, however, Ruger is especially solid financially, with $63 million in cash and no long-term debt. That gives it the flexibility to make strategic moves, and while it has not signaled any particular decision, management did say it was watching Remington Outdoor's bankruptcy filing with an eye toward being opportunistic if the chance arose.

The company also has a number of new products on the market. During the fourth-quarter earnings conference call with analysts, CEO Chris Killoy reiterated Ruger's belief that new products are what ultimately drive sales, and in December it introduced four: the Security-9 pistol, the Precision Rimfire rifle, the pistol caliber carbine, and the EC9s pistol.

Ruger introduced them in December rather than in January, as it usually does, perhaps trying to drum up a little bit more excitement earlier because of the market conditions, but it heralds that the company is able to have a strong product portfolio going forward.

With its shares at 17 times earnings and 19 times the free cash flow it produces, Ruger is trading at a discount to its five-year averages. With the possibility of stricter gun controls being introduced (which tends to increase gun purchases) and a bevy of new products on the market, there are factors pointing to Ruger's stock being at an inflection point.

Management may not have bought its stock at the end of last year, but that doesn't mean you shouldn't consider buying it now.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

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