Gun sales are surging in the U.S. of A. -- and Russia wants in on the action.
Late last year, my fellow Fool Rich Duprey ran down the latest FBI report on background checks for customers desiring to buy firearms, pointing out how on one single day -- Black Friday 2015 -- American gun buyers set a new record with the ATF, filing 185,345 official requests to buy weapons. On the face of it, that would seem to spell good news for U.S. weapons manufacturers Smith & Wesson (NASDAQ:SWBI) and Sturm, Ruger (NYSE:RGR). But it may also attract increasing competition.
Two years ago, as you may recall, Russia's invasion of Crimea in Ukraine sparked a wave of economic sanctions against Russian companies deemed to be associated with the invasion. Russia's Kalashnikov Concern, a subsidiary of arms exporter RosTekh, according to data from S&P Global Market Intelligence, was one such target of the sanctions -- and that complicated the company's business model of manufacturing AK-47s in Russia, importing them through its Kalashnikov USA subsidiary, and selling them here.
Last year, Kalashnikov found a workaround to the sanctions, separating its USA subsidiary from the parent company and switching from an import business model to manufacturing AK-47s locally in Pennsylvania. Demand for the weapons has been brisk, in no small part due to President Obama's own move to restrict gun sales in general by executive order last month. But as Kalashnikov USA points out, another factor that attracts consumers to its weapons is the fact that, while many companies manufacture AK-47 look-alikes in the U.S. already, only Kalashnikov USA makes an AK with real "Russian Heritage."
What it means for Smith & Wesson and Sturm, Ruger
That could make life uncomfortable for rival gunmakers Smith & Wesson and Sturm, Ruger. You see, in an attempt to capitalize upon the popularity of its guns, Kalashnikov USA is opening up a new manufacturing plant in Pompano Beach, Florida.
The new plant will replace a manufacturing operation that Kalashnikov quickly threw together in Pennsylvania in the immediate aftermath of the sanctions last year. In Florida, the company will begin churning out official Kalashnikov-brand AK-47 models "by the second quarter of this year," a Kalashnikov spokeswoman told ForeignPolicy.com.
Because Florida operations have not yet begun, we don't yet know what effect this will have on Smith & Wesson's business, or on Sturm, Ruger's either. It probably won't be a huge disruption, because both of these companies get most of their revenues from handguns. Also, because neither S&W nor Ruger currently make an AK-47 look-alike, Kalashnikov's guns would not compete directly with any of their own models. But both S&W and Ruger do manufacture AR-15 variants, a popular alternative to the AK.
Thus, even if Kalashnikov is not a direct competitor, it is a competitor, and it's a competitor that appears to be growing. That could have an incrementally negative effect on both S&W's business and Sturm, Ruger's.
In any event, it's a development worth watching -- and one we'll want to keep an eye on should these companies' earnings reports start to show signs of weakness. In that regard: Stay tuned. Sturm, Ruger is scheduled to report earnings on Feb. 24, and Smith & Wesson about one week later, on March 1.