The FBI National Instant Criminal Background Check System (NICS) was overwhelmed in March as an unheard-of record 3.7 million background checks were performed on potential gun buyers. This included a massive 300% spike in traffic on March 16, the day after the Centers for Disease Control (CDC) issued new coronavirus guidelines that included prohibiting gatherings of 50 people or more.
No month has seen so many checks performed since the FBI began keeping records in 1998, and the 41% gain in March easily surpassed the previous record of 3.3 million background checks performed in December 2015.
The number of background checks conducted in 2020 is already running 33% ahead of last year, a record year itself with 28.4 million total investigations performed in 2019. If the pandemic persists and as we go further into the presidential election cycle, this year could easily beat all records.
Ready to shoot out the lights
It's obviously going to be a big boost for gun manufacturers like American Outdoor Brands' (SWBI 1.08%) Smith & Wesson and Sturm, Ruger (RGR 0.96%) because until now, distributors and retailers were keeping inventories lean. They'll have quickly drawn down their supply and will need to replenish to match the outsize demand.
Yet it also means ammunition makers will see a similar surge, and most in fact already are.
Federal Premium Ammunition, the world's largest ammunition manufacturer, recently posted on social media that the president of its parent, Vista Outdoor (VSTO 2.06%), and his staff were pressed into service to help hand-pack ammunition to keep up with demand.
Privately held Hornady released a short video telling customers, "We are doing everything we can to ship more, keep people in stock, and keep things moving."
Stocking up on ammo
The unprecedented demand naturally conjures up memories of the ammo shortage from a few years ago when it was virtually impossible to find any stock of the most popular calibers of ammunition anywhere. It's quite possible we're quickly returning to those times.
Online ammunition retailer Ammo.com reports in the 39-day period between Feb. 23 and March 31, there has been a near-800% jump in revenue compared with the 39-day period immediately prior to the survey period, as transactions jumped 574% and order value increased almost 30%.
It means people are buying more ammo more frequently. Not surprisingly, 9-millimeter ammunition is the most popular caliber, followed by the .223-caliber Remington, which is popular for rifles, and the .40-caliber round, from both Smith & Wesson and ACP, which are popular for self-defense purposes.
To protect life and property
Investors should expect Vista Outdoor and industry peer Olin (OLN 2.96%), which owns the Winchester brand of ammunition, to experience a surge in sales.
The two manufacturers were already seeing higher ammo sales prior to the pandemic. Vista reported in early February that its fiscal third-quarter shooting sports segment saw a 2% rise in sales and a 13% gain in profits as ammo sales were up. Olin reported a 6% sales increase, which generated a 63% boost to segment profits.
Those gains occurred when background checks were rising, but not anywhere near what we're seeing today.
It's not so much fear-based buying, at least not related to worries about gun confiscation per se. Instead, during a national crisis such as we're in, and when law enforcement agencies are saying they don't plan to make arrests for petty crimes while prisons are being emptied because of COVID-19, individuals will buy firearms to protect their families and property.
Gunmakers will certainly be challenged in ramping up production that they had only recently been cutting back, but Vista Outdoor, Olin, and the other gunmakers are seeing the same sort of pressing need to follow suit, and will benefit because of it over the coming quarters.