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Is Sturm, Ruger a Buy?

By Rich Duprey - Apr 23, 2021 at 7:40AM

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The gunmaker is in the midst of an unprecedented boom, but it also faces new challenges.

The executive actions recently issued by President Joe Biden highlight just a few of the challenges facing the firearms industry with the current administration, as well as with a Congress willing to reflect its majority control.

In a period where the potential for legislation restricting firearms ownership is heightened, investors need to consider whether gunmakers like Sturm, Ruger (RGR -3.92%) are a buy.

Man holding the Ruger Max-9 pistol

Image source: Sturm, Ruger.

A surging market

Americans continue to purchase firearms at an unprecedented rate. Criminal background checks conducted on potential gun buyers by the FBI through its National Criminal Instant Background Checks System (NICS) are up 49% year over year through the first three months of 2021.

That follows a blowout 2020 that set an all-time record with almost 40 million background checks recorded. Even with the National Shooting Sports Foundation (NSSF) adjusting the raw FBI data to eliminate duplicates and investigations tied to concealed carry permits, it was still a massive number.

More than 21 million checks were performed last year, based on the adjusted count, 60% more than 2019 and 34% more than 2016, the previous record year. Perhaps more important, around 40% of the gun buyers last year were people who purchased their first firearm, according to estimates from the NSSF.

Chart of FBI criminal background checks

Data source: FBI. Chart by author.

Ruger reported sales were up 39% in 2020 to $569 million with growth accelerating in the fourth quarter as the top line increased 61% year over year. The gunmaker doesn't sell firearms directly to the public, only to federally licensed dealers and retailers. Sell-through of Ruger's firearms from its independent distributors to retailers increased 44% from 2019, showing just how much its firearms are in demand as retailers struggle to keep them in stock.

CEO Chris Killoy said in a recent press release, "[A]s a result of the unprecedented demand in 2020, inventories remain depleted throughout the channel, so inventory replenishment provides further opportunity" for growth and expansion.

Net profits at Ruger also nearly tripled last year to over $90 million, the highest level it has recorded since 2013. The company was able to raise prices last year, sell more expensive products, and reduce its promotional offers, all of which contributed to the top-notch performance.

The market's off target

It's clear Ruger and other firearms manufacturers are benefiting from the unique circumstances surrounding the industry, but this strength is not reflected in the stock price.

Sturm, Ruger stock trades at under 14 times trailing earnings, while rival Smith & Wesson Brands (SWBI -5.63%) sports a P/E ratio of just 10. And though the former's shares are up 29% over the past year (Smith & Wesson has gained almost 160%), it lags well behind the 51% gain of the S&P 500. Year to date, both gunmakers lag the broad market and are well off their 52-week highs.

Investors may be taking a bearish view in light of the political risks they face. For example, Biden is calling for changes to legal protections for the firearms industry, in addition to potential bans of modern sporting rifles (MSRs), one of the most popular categories of rifles in the country. The Ruger AR-556, for example, has been a top seller for the company, along with new variants that continue to drive growth -- new products made up 22% of Ruger's total firearms sales last year.

The verdict

Does all that make Sturm, Ruger a buy? Yes, it does.

Here's an industry facing unprecedented demand, and Ruger happens to be a leading name in the market with a bargain valuation. The uncertainty created by any current political pressure only presents an opportunity for long-term investors.

While Smith & Wesson Brands is the more attractively priced stock, Sturm, Ruger still presents a compelling value as a growth stock, and owning both publicly-traded gun companies, who also happen to be the biggest manufacturers in the industry, is its own solid approach.

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Stocks Mentioned

Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
$63.51 (-3.92%) $-2.59
Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
$13.24 (-5.63%) $0.79

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