Since the onset of the pandemic, the firearms industry has been on fire with 2020 holding the all-time record for gun sales and last year being the second-biggest year. But industry demand is slowing now, and gun manufacturers are seeing a hit to their top-line numbers.

Sturm, Ruger (RGR -1.08%) reported a 10% year-over-year drop in fiscal first-quarter revenue to $166.6 million, which CEO Chris Killoy acknowledged came from "consumer demand for firearms (subsiding) from the unprecedented levels of the surge that began early in 2020." Smith & Wesson Brands (SWBI -3.33%) also reported fiscal-third-quarter results in March that showed a 31% slide in sales.

It's no surprise consumer demand is down as fears of the COVID outbreak and the unrest that followed have subsided. What might not be obvious, though, is the fact gun sales remain elevated, and 2022 is still on track to be the third-biggest year for the industry since the FBI began tracking the data.

Woman receiving firearms instruction.

Image source: Getty Images.

On target for future growth

According to the FBI, over 10.8 million criminal background checks on potential gun buyers have been conducted so far this year, a third fewer than the same period last year when nearly 16 million checks were conducted through the National Instant Criminal Background Check System (NICS).

Yet this includes some checks on existing gun owners -- for example, those conducted by police to determine whether a concealed carry permit holder is still eligible to possess the permit. The National Shooting Sports Foundation takes that raw FBI data and removes duplicate checks. They say there have been nearly 5.6 million checks made for gun buyers, a 22% decline from last year and 14% below 2020. 

However, this year's number is 6% greater than 2016, which previously held the record for most background checks. Gun purchases are down from the white-hot levels they reached during the pandemic and its immediate aftermath, but they remain well above historical trends.

Ignoring for a moment the issues of rampant inflation raising costs and supply chain issues creating problems for obtaining raw materials, the firearms industry is still very healthy.

Chart of adjusted criminal background checks.

Data source: National Shooting Sports Foundation.

Reloading while it can

While consumers were buying up firearms at a torrid pace over the past two years, including some 14 million first-time gun buyers, Ruger and other manufacturers were actually having difficulty keeping their distributors supplied with inventory. 

Not that a slowdown is a welcome relief, per se, but Killoy noted in the latest earnings report the company would be using the opportunity to shift its "production mix to allow for a healthy replenishment of Ruger firearms in our warehouses and in the distribution channel, as inventories of many of our product families were depleted in 2020."

First-quarter finished goods for Ruger jumped by 29,800 units, while distributor inventories rose by 80,400 units.

Smith & Wesson's CFO Deana McPherson said something similar during the gunmaker's analyst call in March, noting the company expected "to build internal inventory throughout the fourth quarter as we continue to restock after last year's complete depletion of finished goods inventory."

Looking down the barrel of opportunity

What the firearms industry is actually seeing is more of a return to normalcy, which has long been one of increased demand and rising sales. 

Ruger stock opened lower after announcing results, but the gunmaker is already trading at 7.5 times trailing earnings, 11.4 times forward estimates, and 8.2 times the free cash flow it produces. It also declared a dividend of $0.68 per share, which will fluctuate each quarter, because it is based on a percentage of the company's profits, or about 40% of net income.

While Sturm, Ruger will rarely trade at very rich premiums, it is below its historical levels, and weakness in its shares should be seen as a buying opportunity.