Colt Manufacturing has announced it's halting production of modern sporting rifles like the AR-15, and despite prominent news agencies incorrectly ascribing it to the recent spate of mass shootings, it is still a significant development -- one that could weigh on Sturm, Ruger (NYSE:RGR) and American Outdoor Brands (NASDAQ:SWBI).
Although the gun market has seemingly started to rebound, with the FBI conducting more criminal background checks lately compared to a year ago, Colt's decision to temporarily leave the consumer rifle market suggests there is still a substantial overhang facing other gunmakers.
The AR-style rifle is the most popular firearm in the country, with about 16 million Americans owning them. The AR name stands for the original manufacturer of the rifle, ArmaLite, which eventually sold the rights to the AR-15 to Colt, which modified it and sold it to the U.S. military as the M16 automatic rifle. Colt then made a civilian version, which is why the AR-15 is often confused with a military weapon, but it is just a cosmetic veneer.
By law, the modern sporting rifle -- the industry terms used to differentiate them from other, more traditional types of rifles -- has internal characteristics that make it no different than any other semiautomatic rifle on the market. It fires one bullet at a time with each trigger pull and has the firepower as any other similar chambered hunting rifle.
It is not a "weapon of war" or even an "assault rifle," which are actually machine guns and have been heavily regulated since 1934. Civilian ownership of them was banned in 1986.
Other gunmakers also make AR-style rifles, such as Ruger's AR-556, the M&P15 from American Outdoor's Smith & Wesson, and Remington's R-15 VTR.
Switching from civilian to military markets
The decision by Colt to suspend production of consumer rifles is significant, but not for the reasons being given. Colt said the market had become saturated with ARs and there was plenty of capacity at the moment, noting in a statement that it believed it made "good sense to follow consumer demand and to adjust as market dynamics change."
Because dealers had sufficient Colt AR-15 inventory on hand, it was instead switching its production of rifles to military and law enforcement contracts. The gunmaker was just awarded a $42 million contract by the U.S. Army to make M4 and M4A1 carbines for some 14 foreign governments including Afghanistan, Hungary, Jordan, Kuwait, and Lebanon. The contract will run through 2024.
It makes more economic sense for Colt to focus its attention on that market than on one that is swamped with competing products that are driving prices down. It's why Ruger and Smith & Wesson should take no solace in Colt leaving the consumer rifle market.
Pricing is the biggest pressure
During Ruger's earnings conference call last month, CEO Chris Killoy told analysts, "We see some great prices out there right now on very well-executed M4 platforms like our AR-556. We're seeing a lot of pressure there."
American Outdoor President and CEO James Debny expressed as much, saying the company couldn't really raise prices or had to be very selective when it did, because "if we're not careful, we will just become uncompetitive."
The risk of a weak rifle market falls a little more heavily on Ruger than it does on Smith & Wesson because the former manufactures far more rifles than its rival. Ruger is the biggest gunmaker in the U.S. precisely because it is also the country's biggest rifle manufacturer, making almost 50% more than No. 2 Remington, which declared bankruptcy last year.
Colt says that it will consider reentering the consumer rifle market if conditions improve, but with the weak pricing environment being what it is, Ruger, American Outdoor Brands, and other rifle makers may have a bigger target painted on their backs.