The current surge of demand in the firearms industry is unprecedented. Whether for personal protection or out of fear of further restrictions on gun ownership, people are buying more guns now than ever before.

Yet the stocks of firearms manufacturers like Smith & Wesson Brands (SWBI 1.12%) and Sturm, Ruger (RGR -0.60%) are not performing well. While shares have naturally bounced off the lows hit during the three-year slump of the Trump presidency, they remain well off their highs and some analysts wonder whether this is as good as it gets for the gunmakers.

Pistol on $100 bils

Image source: Getty Images.

A worldwide phenomenon

The gun sales boom is global, at least in countries where gun ownership isn't banned or highly restricted. Brazilian gun manufacturer Taurus says over the first nine months of 2020 it recorded record production numbers at both its U.S. plant in Georgia and at its Brazilian facilities. Sales volumes were 28% higher year over year to 1.29 million firearms, which generated record revenue and profit.

Glock is also seeing a major increase in sales. Last summer, The Guardian reported that the Austrian gunmaker's exports to Brazil surged over 377% over the first six months of the year, helping it account for 31% of all guns sold in the country.

Yet the U.S. remains the primary market for firearms, and last year the FBI conducted nearly 40 million criminal background checks on potential gun buyers. Even stripping out duplicate checks on existing concealed carry weapons permit holds -- which the National Shooting Sports Foundation (NSSF) does to more accurately check consumer demand -- there were more than 21 million background checks performed, 60% more than in 2019 and 34% more than in 2016, the previous year on record.

The NSSF says nearly 8.4 million people bought a gun for the first time last year, accounting for some 40% of all gun sales in 2020, with new demographics like women and minorities making up large percentages. So why aren't gun stocks doing better?

Missing the target

Depressed gun stocks may be a U.S. phenomenon. Shares of Taurus, for example, are up 500% over the past year on the Brazilian stock exchange where it trades, and over 40% higher so far in 2021.

In comparison, Ruger is up 8% year to date and 79% higher over the last 12 months while Smith & Wesson is up 2% and 273%, respectively (Glock is still a privately held company).

While those returns sound good, Ruger is still down 18% from its 52-week high and Smith & Wesson is off 23%, and this is amid an unprecedented bull market for firearms. Smith & Wesson just reported that sales doubled for the third consecutive quarter.

It's not as though the stocks are particularly expensive, either. But coming off of an extended period of depressed earnings can make them look overpriced by certain measures.

Ruger, for example, goes for just 13 times trailing earnings, but trades at over two times sales and 200 times free cash flow (FCF). Smith & Wesson, on the other hand, trades at 33 times trailing earnings, but only eight times next year's estimates and a bargain basement three times FCF.

No let up in sight

The question is, where does the firearms market go from here? It is vexing Wall Street analysts, with one recently saying the gunmakers' comparables will have a tough time as the year progresses. It will lead to their stocks giving way before their earnings do.

Yet there's no indication Smith & Wesson or Ruger -- or any of the U.S. gunmakers, for that matter -- will necessarily have a tough time going up against last year's results. FBI background checks are already up 41% from last year's blowout numbers and even the NSSF-adjusted figures are running 39% above 2020's figures.

There was a significant slowdown from January to February, but there are fewer calendar days in February, and Texas was walloped by freezing temperatures that closed some businesses for a week.

Gunmakers are still reporting high demand at federally licensed dealers and retailers, but customers are being more discerning, waiting for inventory to arrive rather than rushing out to simply buy what's available.

A generational shift

With all the new gun buyers in the market, there is more opportunity for future sales too. A person may have initially bought a concealed carry weapon for personal protection, but now may come back to buy a rifle or shotgun for home defense. Also, the popularity of shooting sports is higher in general following the influx.

There is still a large and growing market for firearms, and though the stocks of the firearms manufacturers may have bounced off their lows, they're still very undervalued in terms of where the industry is sitting.