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Is Sturm, Ruger a Buy?

By Rich Duprey – Aug 27, 2020 at 7:45AM

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The gun industry is poised to have a record year, but sustaining growth may not be so easy.

Sturm, Ruger (RGR -0.61%) was on target in the second quarter, as it reported a 36% jump in firearms sales, enabling it to issue a special dividend to shareholders of $5 per share in addition to its regularly scheduled payout.

Yet the leading firearms manufacturer's stock is down almost 20% from recent highs despite 2020 looking like it will be the biggest year for gun sales in history. Let's take a look at whether the market has a bead on where Ruger is heading, or if its aim is way off.

Woman being instructed on firearms use

Concern for personal safety is causing a spike in demand for guns. Image source: Getty Images.

It's deja vu all over again

Another presidential election means another extended news cycle of debate over potential gun control measures. As has been the case in previous elections, when there are fears that the candidate who's less supportive of gun ownership will win, gun buyers rush out to purchase weapons before any potential bans or limits take effect.

That was certainly the case in 2016. Prior to the election, consumers rushed to buy guns, causing sales that year to soar. After the election, however, gun sales collapsed for three years, the longest decline the industry has seen.

Preparing for the worst

It's taken until 2020 for firearms manufacturers like Ruger and Smith & Wesson Brands (SWBI -0.57%) to be able to shake off the cobwebs and rev up production once more.

According to FBI data, criminal background checks on potential gun buyers are rising at a torrid pace, with 22.8 million investigations conducted through July, some 43% more than the same time last year. Even data adjusted by the National Shooting Sports Foundation to account for things like checks on gun owners with a concealed carry permit to make sure they are still eligible to possess one shows a massive increase in checks.

Background checks don't equate to gun sales, since a potential buyer may be denied, may not ultimately purchase a firearm, or may buy two or more guns. But they do give a sense of the demand for firearms.

Although background checks started trending higher last year, the current spike coincides with the onset of the coronavirus pandemic in March as well as mass protests across much of the nation. The trend indicates that demand is related not only to the politics of gun control but also the protection of people and property.

Still a sense of unease

Sturm, Ruger saw the impact of the renewed interest in firearms that was building back in the first quarter, when sales rose 9% on a 37% jump in shipments.

Neither Ruger nor Smith & Wesson sell firearms directly to the public, only to federally licensed firearms dealers and major retailers. Inventories at these outlets had largely been depleted over fear of being caught with too much stock on hand, as had occurred in 2017 when the bottom fell out of the gun market. One of the largest dealers ended up declaring bankruptcy then, and its inventory flooded the market, lowering prices and profits.

Yet some retailers such as Dick's Sporting Goods (DKS -7.36%), after deciding to exit the firearms business altogether, took actions that inadvertently helped the gunmakers. Dick's chose to destroy rather than sell off its inventory of modern sporting rifles, the industry term for AR-15-style rifles, which removed $5 million worth of such firearms from the supply chain.

Ready to shoot out the lights

Despite the pullback in Sturm, Ruger's stock, its shares still trade at nearly double the level they were back in March, though they go for a reasonable 19 times next year's projected earnings. At 13 times the free cash flow it produces, however, the gunmaker's stock seems to be offering investors a discount, even when compared with rival Smith & Wesson, which trades at 25 times projected earnings and 15 times free cash flow.

Considering Sturm, Ruger is facing what could arguably be one of its best years ever, its stock looks like a buy -- but be forewarned: Another twist in the November elections could see it all come undone again.

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.

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Stocks Mentioned

Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
$50.79 (-0.61%) $0.31
Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
$10.37 (-0.57%) $0.06
Dick's Sporting Goods, Inc. Stock Quote
Dick's Sporting Goods, Inc.
$104.64 (-7.36%) $-8.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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