Firearms maker Sturm, Ruger (NYSE: RGR) reported earnings of $0.43 a share for the second quarter, compared with analyst estimates of $0.30. And if that wasn't enough good news for investors, the company announced a $0.10-per-share dividend.
Like most earnings reports these days, it wasn't all hits. Orders and backlog declined from the first quarter. That could mean less demand going forward. Mr. Market focused on the possibility of lower sales, knocking nearly 10% off the share price following the report.
One firearms sales indicator is FBI background checks. The checks aren't an exact tally of sales, but they're a useful metric for Sturm, Ruger and competitor Smith & Wesson (Nasdaq: SWHC). Last year was a record one for the checks and, for the first six months, 2010 hasn't cooled off much.
|
Year |
January |
February |
March |
April |
May |
June |
6-Month Total |
|---|---|---|---|---|---|---|---|
|
2009 |
1,214 |
1,259 |
1,345 |
1,226 |
1,023 |
968 |
7,035 |
|
2010 |
1,119 |
1,243 |
1,300 |
1,234 |
1,017 |
1,006 |
6,919 |
*All figures in thousands. Source: U.S. Federal Bureau of Investigation.
Sturm, Ruger hasn't just been riding the increased demand for firearms. It has been rolling out new products, and for the past three years, one of its handguns has been named Shooting Industry Academy of Excellence Handgun of the Year. How important is that? Nearly one-third of sales for the first half of this year came from new products.
Some positives
- The balance sheet is solid: No debt and more than $3 per share in cash.
- A $10 million stock repurchase program.
And a few risks
- Near-record firearms demand has eased up and is likely to ease further.
- Firearms sales are frequently the subject of lawsuits or government regulation.
Sturm, Ruger's valuation stacks up well against competitor Smith & Wesson. Trailing and forward P/E ratios are close. The higher forward P/E indicates earnings are expected to decrease -- not the direction investors like to see. Sturm, Ruger wins the balance sheet match, and both companies earn four stars (out of five) in Motley Fool CAPS.
|
Company |
PE (TTM) |
PE |
Debt-to-Equity | |
|---|---|---|---|---|
|
Sturm, Ruger |
9.2 |
12.3 |
0 |
**** |
|
Smith & Wesson |
7.2 |
14.8 |
0.5 |
**** |
*Source: Yahoo! Finance, author's calculations, and CAPS. TTM = trailing 12 months.
Investors looking to add firearms to their portfolio don't have many choices. Smith & Wesson and Sturm, Ruger are the only publicly traded manufacturers. Ammunition manufacturers Olin (NYSE: OLN) and Alliant Techsystems (NYSE: ATK) are also linked to firearms, but both have extensive business operations beyond filling ammo magazines. Retailer Cabela's (NYSE: CAB) provides some exposure to pistols, rifles, and shotguns, but firearms are only a part of its business.
This Fool likes the strong balance sheet and dividend payment offered by Sturm, Ruger, but would rather wait to see if those sales indicators hold steady before buying in.
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