Gun Sales Soar: Should We Buy Gun Stocks?

Posted by Adam English on the Wealth Wire

Firearm sales have been soaring again through the run-up and aftermath of the presidential election. On Black Friday, a new single-day record for point-of-sale background checks was established.

The FBI National Instant Criminal Background Check System logged 154,873 checks that day, nearly 20% more than the previous high of 129,166 set on Black Friday last year.

Industry experts attribute them to worries about administration or congressional efforts to restrict firearms ownership, or the chances that changes to the nation’s highest court could result in challenges to Second Amendment rights.

Two of the largest gun manufacturers are publicly traded, Sturm Ruger & Co., Inc (RGR:NYSE) and Smith & Wesson Holding Corp. (SWHC:NYSE). With sales through the roof, are the companies healthy enough to sustain a long-term run in share prices? Let’s take a look…

Sturm Ruger & Co., Inc. (RGR:NYSE)

Sturm Ruger hit a 61% increase in earnings and a 47% increase in sales. It has a market capitalization just under $1 billion, A little over $100 million in cash or equivalents and absolutely no debt. With earnings-per-share of $3.20, the company has an price vs. earnings ratio on 16.34.

Sturm Ruger averages a 2.6% dividend yield and just announced an ex-dividend of $4.50 per share. At the time, it represented a dividend yield is 92.17%. With ex-dividends, stock prices normally drop about the same amount as the dividend payment, which would account for the very recent dip.

Sturm Ruger traded as low as $5.18 in November 2008 and has recovered throughout the recession. As we can see from the chart, a mid-summer dip couldn’t keep the stock from doubling over the last year, with most of the action happening in 2012.

Smith & Wesson Holding Corp. (SWHC:NYSE)

Smith & Wesson just announced a 48% surge in firearms sales and a quarterly profit of $21.2 million dollars. That compares to a $1.6 million loss in the same quarter last year.

The companies backlogs are incredibly strong at $332.7 million at the end of the quarter, up 122% from last year.

In October 2008, stock prices fell as far as $1.58 a share. As Wealth Wire went to the press, it was trading around $10.20. Smith and Wesson has a market cap of $670 million, EPS of 0.65 and a P/E of 15.65. The debt to equity ratio is around 34%, which is considered quite acceptable.

Should You Buy?

Whether or not you should buy into either company should depend on what you are looking for from the stock and how you think gun sales will trend in the future.

Both companies are riding along with the massive surge in gun sales that spanned most of the year and just reached dizzying new heights. If you believe that gun sales will stay strong and be sustained, then perhaps it is the right time to add one of these companies to your portfolio.

When choosing between Sturm Ruger and Smith & Wesson, your investment philosophy should come into play.

Sturm Ruger just gave out an amazing dividend, but the window to capture it has closed. It will continue to offer excellent dividend returns in the future, and the lack of debt will give it a lot of leeway if sales slow.

If you would prefer to buy into a growth stock, Smith & Wesson would be your choice. There is no dividend, but the company is digging itself out of a rough time in 2011 and did not have to add excessive debt.

The hefty backlog is very promising, along with a highly praised new line of firearms – the “M&P” line – that is receiving rave reviews from private owners along with police departments and organizations. Both aspects should help sustain sales and make it easier for Smith & Wesson to capture market share.

Keep in mind that the specter of increased gun control is cited by industry experts as a major cause of the jump in sales. Both Sturm Ruger and Smith & Wesson will continue to profit with President Obama in the White House and they know it.

Sturm Ruger CEO Michael O. Fifer stated last year in a company sales call, “I think half of the people in the firearms industry, if asked, would hope [Obama] is not President, but then will secretly go out and vote for him again.”

As long as the threat remains to our gun rights, people will feel compelled to act before restrictions can be enacted.

Post courtesy of the Wealth Wire