Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Axon Enterprise Inc (AAXN) vs. Sturm, Ruger & Company Inc. (RGR)

By Brian Stoffel – Apr 6, 2018 at 9:33AM

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 produces guns and bullets. The other wants to make them obsolete. Which stock comes out ahead?

After a spate of recent school shootings, guns are in the headlines again. Perhaps that's what will make today's matchup interesting. One company -- Sturm, Ruger (RGR 1.50%) -- manufactures the weapons. The other -- Axon Enterprises (AXON 4.29%), formerly known as TASER International -- has a stated purpose to make the bullets obsolete.

It's an interesting dichotomy to investigate. But we'll go beyond moral posturing to look at the fundamentals of each company. We'll determine which is a better buy at today's prices by evaluating each through three different lenses.

A 9mm pistol with bullets strewn around it

Image source: Getty Images.

Financial fortitude

We'll start off with the easiest of the three to decipher: financial fortitude. The goal here is to figure out where a company falls on three different points of a continuum.

  • A fragile company has lots of debt, little cash, and not much free cash flow. It is vulnerable to going under should an economic crisis hit right now.
  • A robust company has moderate levels of cash and debt, along with predictable cash flow. Over the long run, if a crisis hit today, the company would emerge largely unscathed.
  • An antifragile company actually stands to benefit from a downturn in the long run, thanks to a strong balance sheet and healthy cash flow.

Crucially, an antifragile company can emerge stronger by buying back shares on the cheap, acquiring distressed rivals, or simply undercutting the competition on price. Keeping in mind that Axon is valued at over twice the size of Ruger, here's how the two stack up.

Company Cash Debt Free Cash Flow
Axon $119 million $0 $8 million
Ruger $64 million $0 $68 million

Data source: Yahoo! Finance. Cash includes long- and short-term investments. Free cash flow presented on trailing-12-month basis.

While both companies are buoyed by being debt-free, it might seem like Ruger has the upper hand: It has much stronger cash flow.

But I don't think that's necessarily the case. One of the reasons Axon's cash flow has been hampered is that the company is actively expanding into the police body-camera business -- which includes giving cameras away for free to any law enforcement officer who wants them. Before this effort began in earnest, free cash flow came in at over $40 million in 2015. While painful in the short-run, the move makes long-term sense: departments using Axon cameras will subscribe to the platform for storage and analytics, and they will have very high switching costs (more on that below).

The other aspect has to do with competition. Axon is competing against much smaller camera companies -- like VieVu. If an economic crisis hit, Axon would be in a strong position relative to competition.

Ruger is also in a strong position relative to the competition: Its two biggest publicly traded rivals -- American Outdoor Brands and Vista Outdoor -- have net negative cash positions.

In the end, I'm calling this a draw.

Winner = Tie.


Next, we have a slightly murkier variable: valuation. While there's no single metric that can tell us how "cheap" or "expensive" a stock is, we can consult multiple data points to build out a more holistic picture.

Company P/E P/FCF P/S Dividend FCF Payout
Axon 91 274 6.4 N/A N/A
Ruger 19 14 1.8 1.8% 35%

Data sources: Yahoo! Finance, E*Trade. P/E = price to earnings, P/FCF = price to free cash flow, P/S = price to sales. P/E is calculated using non-GAAP (generally accepted accounting principles) earnings when applicable.

On this facet there's no contest. High expectations are baked into Axon's price; Ruger is not only cheaper on every metric, but it also offers dividends to shareholders.

Winner = Ruger.

Sustainable competitive advantage

Finally, we have the most important -- and prosaic -- of the three criteria: sustainable competitive advantage, often referred to as a company's "moat." At its core, a moat is that special something that keeps customers coming back to one company, and shunning the competition, for decades.

Ruger's primary moat comes from the strength of its brand name. That's nothing to sneeze at, but it's also the very same moat that Axon has when it comes to its weapons segment. The company's stun guns -- Tasers -- have a ubiquitous presence in police forces around the world.

What gives Axon the edge? Departments that use Axon body cameras then store and sort their footage on the platform. not only stores footage, but uses AI to make the data searchable. The company will also be coming out with a records management system (RMS) this year which could save departments thousands of staff hours.

Both of these services -- and the upcoming RMS -- will be available on a subscription basis. That not only provides predictable recurring revenue, but creates high switching costs for departments that sign on. No one would want to risk losing evidence, or pay for data migration away from, unless there was a very strong incentive to do so.

That gives Axon the edge here.

Winner = Axon.

My winner is...

So there you have it: a tie. Whenever this is the case, I always side with the company benefiting from the widest moat. In this case, that means Axon. I have my own skin in the game here, as well, as the company makes up 5% of my real-life holdings. I think if you're looking for a wide-moat play in law enforcement -- and have the stomach for volatility along the way -- Axon is definitely worth investigating.

Brian Stoffel owns shares of Axon Enterprise. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a disclosure policy.

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

Axon Enterprise Stock Quote
Axon Enterprise
$120.95 (4.29%) $4.98
Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
$52.04 (1.50%) $0.77

*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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

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.