U.S. firearm stocks are shooting skyward amid predictions that gun sales are poised for a banner year.
The shopping spree for revolvers, pistols and rifles is being fuelled by fears that U.S. President Barack Obama will bring in gun control laws if re-elected in November. Sales spiked after his 2008 election because of his anti-gun stance, but nothing happened. Now, there are worries he will forge ahead in a second term because U.S. presidents are constitutionally barred from a third mandate.
In a country whose Constitution allows its citizens to bear arms, renewed worries about being deprived of their gun rights has sent shares of firearm makers soaring. While the stocks of Sturm Ruger & Co. Inc. and Smith & Wesson Holding Corp. Inc., are respectively up nearly 50 and 80 per cent this year, some observers suggest there is more upside in these two pure-play gun stocks as economic reasons provide additional reasons for Americans to load up.
The explosion in gun sales was evident last week when Sturm Ruger announced that it had to stop taking new orders until the end of May. After requests for more than one million units in the first quarter, the company said it could not keep up with demand.
"That stock has been like a rocket," says Stephen Rogers, a portfolio manager for Toronto-based Horizons Investments Inc., and owner of Sturm Ruger shares since December. "There has clearly been much stronger demand through Christmas and the new year than [the company]or even the analysts were expecting."
In a tough economy, U.S. citizens are buying more guns as some municipalities cut back on police services, while more states are granting permits to carry concealed weapons, he said.
Mr. Rogers likes Sturm Ruger for a play on gun sales, saying it is a "rock solid company" with no debt, and should grow 15 to 20 per cent over the next two years. The stock trades at 15 times forward earnings "which to my mind is a market multiple," and could easily hit the mid-$50 (U.S.) range this year, he said.
Analyst Jim Barrett of CL King & Associates Inc., who is also upbeat on Sturm Ruger, raised his one-year target on its stock to $53 a share after it suspended new orders. "We are raising our earnings forecast, assuming that new workers Ruger is recruiting in New Hampshire are trained and helping to reduce the bottleneck," he said in a report.
Background checks requested by gun dealers to the Federal Bureau of Investigation's National Instant Criminal Background Check System (NICs) are a key indicator of gun sales. In crunching that data, the National Shooting Sports Foundation, the industry trade group, said that there were 1,266,344 checks made in February, a gain of 31.4 per cent over the same month in 2011. That was the 21st consecutive month of increases.
"We expect this year to be a banner year [for sales] largely driven by the election," said Larry Keane, senior vice-president and general counsel for NSSF. "Within the past 18 months, retailers have told us that 25 per cent of the people they see now are first-time buyers.… More women are involved in hunting and shooting sports than ever in the history of the United States."
Analyst Bret Jordan of Avondale Partners LLC said he now prefers Smith & Wesson over Sturm Ruger, whose stock has enjoyed a nice bump because it is well-run and financially stronger.
Smith & Wesson, which went through a management change last year to refocus on its gun business "as opposed to some misdirected acquisitions," will benefit not only from rising demand for firearms, but also potential to improve on operating margins, he said. The firm recently raised its sales forecast for this year to between $395-million and $400-million from the $385-million to $395-million range.
Mr. Jordan, whose one-year price target of $8 a share on Smith & Wesson is under review, expects its stock price to return to double-digits again. "If you look back into the not too distant past, the stock was in the $20-range and bottomed around $2," he said. "I am not sure we are going to retrace all the way back to what was maybe an inflated high, but I think you have some potential in earnings growth in Smith & Wesson still."
Sturm Ruger & Co. Inc.
Founded in 1949, the Southport, Conn.-based gun maker gets about 99 per cent of its revenues from firearms sold mainly to U.S. customers. Sturm Ruger, which went public in 1969, gained a reputation for the quality of its Mark 1 .22-calibre auto-loading pistols often used for target shooting. Last month, the firm raised its annual dividend to 84.8 cents a share.
Smith & Wesson Holding Corp.
The Springfield, Mass.-based gun maker, which was founded in 1852, has been sold several times in its long history. Management acquired the firm in 2001 from British-based Tomkins PLC, and took Smith Wesson public the same year. The main business is firearms, but the company has a security division that it plans to divest. The firm's .44 Magnum revolver was made famous by Clint Eastwood in the Dirty Harry movies.