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In what can only be described as the greatest irony in the history of the gun control debate, gun stocks have done phenomenally well during Barack Obama’s presidency. They do particularly well every time he speaks about gun control. This isn’t intended as a political statement, it’s just a fact that Americans embrace their gun ownership rights, and when they feel they are being threatened, they buy more.
On Tuesday, following Obama’s announcement of a series of planned executive actions related to gun control, Smith & Wesson (NASDAQ: SWHC) shares rose 11%. Fellow gun maker Sturm, Ruger & Co. (NYSE: RGR) saw its shares rise 7%.
Smith & Wesson is up almost 600% since Obama took office. Smith & Wesson’s net income has done very well over this period, and it exploded in 2013. Margins have improved. The company continues to market itself for more law enforcement and military use.
Debate Propels Sales
As it is, Smith & Wesson and the gun sector already see multiple purchases by gun owners, so political jawboning simply enhances a trend already in place. Some 90% of those who own a gun will buy another, and the average gun owner has more than five firearms. Background checks continue to increase; Smith & Wesson just reported that December background checks “reflected strong growth compared to December 2014.”
Smith & Wesson’s recent earnings report in December was impressive, with gigantic increases in gross margins, and total sales up over 30%. It’s the most recognizable name in the industry, and the company just purchased a big name in the hunting sector.
Smith & Wesson also recently increased its expected revenue and earnings range. The company expects FY16 earnings to come in between $1.21 and $1.26. With the stock closing Wednesday at $24.72, it trades at about 20x earnings, which is reasonable.
Sturm, Ruger shares are also up substantially over the past few years, and just a hair off the stock’s 52-week high. Sturm, Ruger has experienced the same pattern as Smith & Wesson, with 2013 being its banner year. Both companies, however, manufactured too much for 2014 and part of 2015, leading to depressed results.
Still, the two gun companies generate about the same in revenue, although Sturm, Ruger has lower margins but higher net income. It also has a better balance sheet with $60 million in cash and no debt. Smith & Wesson holds $54 million in cash but that is offset with $170 million in debt.
Sturm, Ruger also generates more free cash flow and pays a 2.5% dividend. It also trades at around 20x earnings.
Which of the Gun Stocks to Own?
As far as the current choice between the two, there isn’t a clear-cut winner, but if I had to choose, I would go with Sturm, Ruger. I like the free cash flow and dividend. But I see nothing wrong with buying both.
One fair question is whether the stocks are overextended. When you examine the charts, there’s another distinction that leans in Sturm’s favor. Smith & Wesson just hit all-time highs, but the stock has soared off its base, and looks like it has risen too far, too quickly.
Sturm has not quite flown as high or as fast. In fact, it remains below its all-time high of $81. I think, given the chart patterns, that Sturm is probably the more conservative play here with less downside risk based solely on those patterns.
Regardless, I think gun stocks are a good buy for the long term. It’s one of the “Four G’s” that people turn to in difficult times: gold, God, girls and guns.
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