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Is Sturm, Ruger Stock a Buy?

By Rich Duprey - Dec 22, 2020 at 9:25AM

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The firearms manufacturer's stock hasn't gone anywhere for months.

Even though Sturm, Ruger (RGR -0.11%) has been going great guns this year, the firearms maker's stock is down 25% from the all-time high it hit back in August. 

Although sales were up 53% in the third quarter compared with last year, profits soared fivefold, and management says demand shows no sign of letting up, the stock market has been keeping shares between $60 and $70 a share for the past three months.

Is there something brewing that wouldn't make Ruger's stock a buy? Let's take a closer look.

Woman receiving firearms training

Image source: Getty Images.

A wave of new gun owners

2020 has been a good year for Ruger's fundamental business. The National Shooting Sports Foundation notes that an estimated 7.7 million people bought their first gun this year, one in which over 19.1 million background checks on potential gun buyers were conducted.

The record-breaking demand for guns has created a simultaneous spike in ammunition sales -- and a massive shortage -- leading Vista Outdoor's (VSTO -1.11%) president of ammunition to take to YouTube to plead for consumer understanding that his company is working overtime to produce as much ammo as it can.

Ruger sells only to federally licensed firearms dealers and retailers, and its distributors report that inventories remain depleted.

Is another gun control push on the way?

Those strong sales could continue well into 2021 and beyond. President-elect Joe Biden talked tough about gun control during his presidential campaign. He's called for enacting universal background checks on gun buyers, prohibiting online sales of firearms, banning certain types of semiautomatic rifles, launching mandatory gun buybacks, and repealing the legal protections that shield gun manufacturers from those who use firearms to commit crimes.

Those are all hot-button issues for gun owners and enthusiasts who fear further encroachment on the right to own firearms. It was those sort of talking points during the Biden's time as vice president that fueled what was then the greatest spike in sales and earned former President Barack Obama the moniker of world's greatest gun salesman, even though no legislation ever came of it.

Such talk in a Biden administration will undoubtedly keep tensions with the gun community running high, generating more sales for Ruger, industry peer Smith & Wesson Brands (SWBI -1.04%), and other gun manufacturers.

Sweet dividends

Higher sales will naturally lead to higher profits for Ruger, and that also means Ruger's dividend payment should continue to rise.

Unlike many companies that pay a set dividend to investors every quarter, Ruger's payout is tied to its net income, with management currently targeting roughly 40% of profits. Thus, as the gunmaker's earnings rise, so will the dividend.

Its $0.56-per-share dividend in the third quarter was about four times greater than the $0.14 per share it paid to investors in the same period last year. It was 33% higher than the dividend it paid just three months prior in 2020's second quarter.

Ruger also issued a special dividend of $5 per share to investors in the second quarter, to share with them the success it's been enjoying.

The price is right

Even though Sturm, Ruger's stock is up 45% year to date and 77% above the low point it hit back in March, it still trades at significant discounts.

Shares go for just 17 times trailing earnings and 15 times next year's estimates, but they trade at a bargain-basement rate of 10 times the cash flow it produces.

There's little reason for the gunmaker's stock to be so low, not with all the catalysts for growth building up behind it like a tsunami ready to crest. Investors looking for a great business to buy at a cheap price won't go wrong with Ruger.

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Stocks Mentioned

Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
RGR
$63.87 (-0.11%) $0.07
Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
SWBI
$13.86 (-1.04%) $0.14
Vista Outdoor Inc. Stock Quote
Vista Outdoor Inc.
VSTO
$37.54 (-1.11%) $0.42

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

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