Declining Gun Sales

Tips for Investors

Declining Gun Sales
May 21, 2015

Is the run on guns over? Recently released data suggests it just might be. After soaring during President Obama’s first term in office due to fears among many gun enthusiasts about new gun control laws, sales have slowed down recently as it becomes apparent that these fears may have been for naught.

In fact, gun control laws have actually been loosened in several states. With Republicans now in control of Congress, it appears unlikely that gun control momentum will pick up again soon.

Fewer Gun-Owning Households

According to the latest General Social Survey (GSS), the percentage of Americans who say they either own a gun or live with someone who does has fallen to 31 percent. This ties the record low level of gun ownership in America that was set in 2010. In comparison, about half of Americans said they owned a gun or lived in a gun household in the late ‘70s and early ‘80s.

Last year, sales fell at the three largest U.S. firearm manufacturers: by 30 percent at Remington; 21 percent at Sturm, Ruger & Company; and 15 percent at Smith & Wesson. Also, federal gun permits are down about 9.5 percent during the first three months of this year compared with 2014.

In addition, federal background checks on individuals wanting to purchase guns fell by 12 percent last year after rising steadily for a decade — another possible sign of declining gun sales. This decline has been attributed to such factors as a decreasing popularity in hunting, aging of the current gun-owning population, less intense demand on the part of gun owners, and an increase in the number of single-parent homes headed by women (since fewer women than men own guns).

Another potential factor in declining gun sales has been the lack of a recent high-profile violent incident involving guns. This is obviously good news for our society, but it does tend to dampen gun-buying enthusiasm on the part of potential new buyers.

Time to Jump Ship?

So does declining gun sales mean investors in major firearm manufacturers should jump ship? Not necessarily.

For example, look at what has happened to the share price of Smith & Wesson (SWHC): This stock soared from under $3 per share in 2012 to nearly $17 per share last June. It then fell to under $10 per share last December, but has risen back to near $15 now, close to its peak last summer.

In an article published last December after Smith & Wesson had released disappointing quarterly financial results, The Motley Fool pointed out that its stock actually climbed 4 percent the day after the announcement: “Investors are willing to forgive Smith & Wesson for its weak outlook because it is delivering on its long-standing promise to, as CEO James Debney regularly puts it, ‘manage our business for the long term in a way that gives us the ability to take market share, independent of whether the market is growing or shrinking,’” The Motley Fool wrote last December 10. Since then, the stock price has risen from $9.55 to $15.01 on April 24.

One factor that could be boosting SWHC is its announced acquisition of Battenfeld Technologies, a firearms accessories and supply specialist. This acquisition is expected to result in lower production costs and higher profits for Smith & Wesson. The Motely Fool noted that when Smith & Wesson announced this acquisition last November, it estimated the addition would provide incremental revenue in fiscal 2016 of $55 million and a healthy 27 percent EBITDA margin on that revenue, or roughly $15 million.

Analysts estimate that Smith & Wesson should be able to increase sales by 10 percent annually and earnings by 15 percent annually over the next five years by targeted first-time and female gun buyers. Perhaps presciently, The Motely Fool wrote in December: “Smith & Wesson will be set to rebound as sellers restock its firearms and the industry returns to more normalized levels.”

The share price of Sturm, Ruger (RGR) is also rising despite declining gun sales. It has soared from $34.90 per share on January 2 to $56.18 on April 24. Five years ago, RGR was priced under $17 per share.

Looking Beyond Gun Manufacturers

Firearm manufacturers are not the only companies affected by falling or rising gun sales. You might also want to look at sporting goods retailers like Cabela’s (CAB), which has become a preferred firearm retailer since Dick’s Sporting Goods stopped selling semi-automatic weapons. Its stock price is up slightly this year, from $52.71 on January 2 to $54.19 on April 24. Also, chemical manufacturer Olin (OLN), which owns ammunition manufacturer Winchester, has seen its stock price soar from $23.00 on January 2 to $30.84 on April 24.

If you want to invest in the firearms industry, there are several different ways to play. You should perform careful due diligence and research that goes beyond just broad statistics on rising or falling gun sales.

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