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Smith & Wesson Holding vs. Sturm, Ruger & Company: Which One Does Better for Investors?

By Motley Fool Staff - Jan 10, 2016 at 7:32AM

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Some insight for those considering putting money into the two publicly traded biggies in the gun industry.

When looking at pure-play gun manufacturers, two companies stand out: Smith & Wesson (SWBI -0.59%) and Sturm Ruger (RGR -0.43%).

In this video segment, Sean O'Reilly and Vincent Shen talk about how the two differ in fundamental performance and dividends, provide some advice for investors looking to get into the industry during this volatile time, and how politics can affect an investment in the industry.

Listen to the full podcast by clicking here. A full transcript follows this video.


This podcast was recorded on Jan 5, 2016.

Sean O'Reilly: So, I'm a value guy. Talk to me about where these guys are trading.

Vincent Shen: Sure, sure. I know you're going to ask me at the end of the show which I think is better.

O'Reilly: Of course I am.

Shen: I'm going to pre-empt that question and cover it a little bit. Sturm Ruger...

O'Reilly: Which stock would Dirty Harry buy?

Shen: Smith & Wesson obviously, but Sturm Ruger pays a 2.5% dividend [yield] so it's a little different, because where Smith & Wesson doesn't pay one at all. Valuation-wise, they're very similar. I calculated this based on their prices this morning with the surge they've seen recently because that's likely to continue, and based on expected 2015 calendar year earnings. Twenty-two times for Sturm Ruger, 21 times for Smith & Wesson. Keep in mind that Ruger has a really strong balance sheet, no debt; they have very strong free cash flow.

O'Reilly: Are these family controlled? I'm reaching into the cobwebs here. Do they have a big...

Shen: I do not recall.

O'Reilly: Anyway.

Shen: They have really strong free cash flow to cover the dividend payouts. Honestly, both companies have a very strong name reputation in this industry. Like I mentioned Smith & Wesson 21 times, no dividend, but similar strong cash flow. If you were to ask me to pick, I think it's really tough.

O'Reilly: It sounds to me like you'd be both and be fine.

Shen: I think you should look not at the companies separately necessarily if you're first considering investing in this industry. You need to look at the volatility, and the fact that these companies are not necessarily going to be driven by business fundamentals and things along those lines. A lot of it is going to rise in lockstep with each other, and a lot of it is going to be driven by headlines, what happens in the political landscape. It's just tons and tons of volatility. If you're OK with that...

O'Reilly: This has a speculative feel to it.

Shen: Exactly.

O'Reilly: It really does.

Shen: I think for a stock like this, or for an industry like this, taking a truly long-term view is your best bet because trying to, I think anybody who's trying to bet off the election...

O'Reilly: Right, so do you want to own these guys regardless of what happens in the next year? Or presidential or anything?

Shen: Then between the two companies, you can look at that income component that Ruger offers.

O'Reilly: Yeah, that's a surprise. It's very reasonable.

Shen: Mm-hmm. Otherwise, considering either of these, definitely take that long-term view, and also just consider the fact that it might get hit whether you think that this is doing well or not. Just with the way events can take place, the presidential election, and everything else.

Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
$58.50 (-0.43%) $0.25
Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
$15.21 (-0.59%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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