Firearms manufacturer Sturm, Ruger (RGR -0.63%) reported another strong quarter of gun sales with revenue soaring 54% and profits more than doubling. 

While the market sold off gunmakers in July after adjusted background checks seemed to indicate the "Biden bump" in the industry was already coming to an end, Ruger's results show there's plenty of demand from consumers for firearms. But there's one number in the firearms manufacturer's earnings report investors should be focusing on to get a good sense of where it and the industry may be heading.

Person receiving shooting range instructions.

Image source: Getty Images.

Targeted growth

The headline figures for sales and profits are two indicators an investor might typically use to get an idea of the direction gun and ammunition makers are going. 

Ruger's firearms sales hit $199.4 million for the quarter ended July 3, and year to date, they're up 52% to $383.0 million, which is a remarkable achievement given just how strong last year was.

In 2020, gun sales hit an all-time record, and the National Shooting Sports Foundation (NSSF) estimated 8.4 million people bought their very first firearm last year. Ruger reported firearms sales jumped 39% in 2020 to $565.9 million, while earnings nearly tripled to $5.09 per share. CEO Chris Killoy said in the fiscal 2020 earnings release, "Our tremendous sales growth and profitability in 2020 was driven by the historic surge in consumer demand that began late in the first quarter and continued throughout the year."

Adjusted background checks by month

Data source: National Shooting Sports Foundation. Chart by author.

A record at any other time

And this year, sales are still running hot.

FBI background checks on potential gun buyers are 10% above the year-ago pace that set new records for the agency since it began collecting this data in the late 1990s. But the raw data in the National Instant Criminal Background Check System (NICS) contains things such as periodic checks on concealed carry permit holders -- the NSSF excludes that noise to get a better picture of actual consumer demand for firearms.

Through the first seven months of 2021, adjusted NICS data shows background checks are actually down 9% year over year. That's why many assume the gun-buying surge has come to an end, but 2020 set the record for the highest number of checks in history.

This year, the industry is still often seeing the second-highest number of checks for any particular month, and if you compare 2021 year to date to the same period in 2019, they're up 56%. The year-to-date adjusted background checks are also 30% higher than the prior record-setting year of 2016. Consumer demand for firearms is still very much elevated across the industry.

The real number to watch

Even that doesn't give investors a full picture, though, because there are seasonal fluctuations and events that can drive short-term sales spikes. Instead, they should look at how many firearms Sturm, Ruger's distributors are selling to retailers.

Like most manufacturers, Ruger doesn't sell firearms to the general public, only to federally licensed firearms dealers. And in 2020, the company estimated 1.95 million of its firearms were sold from distributors to retailers -- one of the gunmaker's best performances ever. Only 2013 and 2016 were better.

So far in 2021, however, Ruger estimates the number of units sold from distributors to retailers, the figure it uses to set its production activity, exceeded 1.10 million, or an increase of 13% year over year. That figure is also tracking ahead of both 2013 and 2016. Forget the noise -- this is where investors should be looking.

Cheap gun stocks

Sturm, Ruger is trading at 11 times trailing 12-month earnings, a deeply discounted rate, though the market doesn't often assign the stock a premium.

The firearms industry is volatile and subject to the whims of outside events and political and regulatory interference. The threat of gun control, for example, introduces an element of risk to this story, but Ruger's business still looks like it's on solid ground -- and growing.