Sturm Ruger & Co.
NYSE: RGR
December 9, 2016
Nathan Yates, M.S.F.
Sturm Ruger: Shooting
for Higher Profits
Forward View is initiating formal coverage of Sturm Ruger (NYSE:
RGR) with a Hold rating and a $53 target price.
Director of Research
[email protected]
One-Year Stock Price Chart
Fred Campbell, M.S.F.
Research Analyst
[email protected]
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• Sturm Ruger is
a small-cap
firearms
Business Summary
for the ability to
Whenever firearms are discussed, it’s been our experience that Smith &
Wesson (SWHC) is invariably mentioned. The name is emblazoned in our culture
as a symbol of leadership in the gun industry. What may surprise some, even
though SWHC is the industry leader in pistol sales and more than 100 years older,
is that Ruger (formally known as Sturm, Ruger, and Company) was the leading
manufacturer of firearms in the United States until 2015. Tables 1 & 2 show that
Ruger maintained a solid lead in the last five years (through 2014, the last year
that Shooting Industry has published records) although S&W and Remington have
switched between second and third place.
withstand
Table 1: Firearms Produced by Type (2014)1-5
manufacturer.
• The company’s
guns are known
rugged use.
• American
middle-class
shooters are the
firm’s #1
market.
• The over 3%
dividend yield is
appealing, but
the stock is
more expensive
than Smith and
2014
Pistol
Ruger
722,029 281,430
706,192 4,446
1,007,905
1,714,097
S&W
914,700 268,722
159,276
1,183,422
1,342,698
479,306
1,409,129
Remington 65,771
Revolver Rifle
Total
Total
Shotguns Handguns Firearms
0
0
929,823 413,535
Table 2: Total Firearms Produced (2010-2014)1-5
2010
Ruger
2011
2012
2013
2014
903,968 1,114,687 1,651,975 2,180,780 1,714,097
Remington 555,794 1,026,860 1,162,744 1,401,380 1,409,129
S&W
681,834 857,043
1,124,767 1,505,963 1,342,698
Wesson
(SWHC).
• We prefer
SWHC over
RGR.
A second takeaway from this data, besides defining that Ruger is an
industry leader, is that the gun industry is extremely volatile. Figure 1 presents the
percentage change of firearm production for the three manufacturers combined
and Figure 2 shows the change for the three leaders individually during the
periods between 2010 and 2014. These figures show not only volatility in the
industry but between companies as well.
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Figure 1: Percentage Change in Firearms Produced (Aggregate Top Three)1-5
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
2011
2012
2013
2014
-20.00%
Figure 2: Percentage Change in Firearms Produced (Top Three Separately)1-5
100.00%
80.00%
60.00%
Ruger
40.00%
Remington
20.00%
S&W
0.00%
2011
2012
2013
2014
-20.00%
-40.00%
This brief industry introduction was given to show the reader that firearm companies have not behaved
rationally (as defined by the market) in the last few years. As anyone with any political acumen knows, the
recent swings in firearm production and sales have correlated to events during the terms of President Obama.
Any time gun control has been mentioned, gun sales have risen sharply. Whether or not these purchases have
been rational decisions we leave to the reader, but suffice it to say we believe the wild swings will end during
the Trump administration as he strongly supports the right to own a firearm. Table 3 shows the performance of
both RGR and SWHC stocks in the weeks before, during, and after the election (November 9 is bolded as it was
the first trading day after the election). It’s apparent the markets were expecting a Clinton victory and further
stockpiling of weapons by gun enthusiasts. When this did not occur, each stock dropped almost 20% and, as of
November 14, each is now beginning to rise to what we believe will settle at their fair value. We expect, during
the next four years anyway, the firearm stocks to be more fundamentally driven.
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Table 3: RGR and SWHC Stock Performance During Election Cycle6
Date
RGR
% Gain/Loss
SWHC
% Gain/Loss
11/1/2016
$60.70
11/2/2016
$61.85
1.89%
$26.32
1.00%
11/3/2016
$62.35
0.81%
$26.69
1.41%
11/4/2016
$63.90
2.49%
$27.24
2.06%
11/7/2016
$63.85
-0.08%
$27.85
2.24%
11/8/2016
$64.40
0.86%
$28.45
2.15%
11/9/2016
$55.10
-14.44%
$24.12
-15.22%
11/10/2016
$48.45
-12.07%
$21.98
-8.87%
11/11/2016
$47.50
-1.96%
$21.24
-3.37%
11/14/2016
$50.75
6.84%
$23.58
11.02%
$26.06
Now that we have touched on our thoughts for the industry, let’s look at Sturm Ruger as a company.
Table 4 and Figure 3 show their change in sales since 2011. Much like firearms produced, the firm’s sales have
not gone in a linear manner. Interestingly enough, even during the “downturn” of 2014, sales were still more
than double from that in 2010.
Table 4: RGR Sales (Millions)7,8
2011
2012
2013
2014
2015
Rifles
$83.40
$143.90 $217.60 $203.90
$208.50
Pistols
$150.00 $216.50 $293.50 $198.20
$192.20
Revolvers
$69.90
$92.70
$108.20 $112.80
$113.30
Accessories
$20.20
$31.80
$59.30
$23.90
$30.30
Casting
Products
$4.62
$6.90
$9.70
$2.20
$6.20
Total Sales
$328.12 $491.80 $688.30 $541.00
$550.50
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Figure 3: RGR and SWHC Sales
Investment Potential & Risks
We could also go on about the wild swings in stock price during the Obama Administration but that
would be redundant. We have made our point about the industry and now we must recommend a strategy
toward RGR. Why or why not should you buy the stock?
Investment Opportunity
RGR gets about 99% of its revenue from firearm sales (Casting Products is the only segment they
consider non-firearm). The continued growth of this company depends on political, social, and even
international events and the election of Donald Trump was a tremendous boost to the industry. With Mr. Trump
winning the election, we believe the fight for further gun control will take a breather for at least the next four
years. In fact, Mr. Trump has suggested a law requiring reciprocity on concealed carry permits. As stated
before, we don’t see any future events that would cause mass gun purchases as seen in the last eight years, but
we do see a stable market for firearms.
Concealed carry permits have grown over 150% in the last eight years. Figure 3 below shows the trend
since 2007, a 150% percentage increase. This trend will continue because there is a sense that violent crime is
steadily increasing, thus more people are carrying firearms for protection. Both RGR and SWHC have noticed
these trends and produce handguns just for concealed carry usage.
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Figure 4: Concealed Carry Permit Increase Since 20079
Percent US w/ Concealed Carry
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Also, Ruger has a strong relationship with the NRA, and that is extremely important in this industry. If
you read our report on SWHC, you would see that an NRA boycott almost put them out of business. Ruger had
a special event this year called the 2 Million Gun Challenge in which they donated $2 to the NRA for every
pistol sold. Their goal, obviously, was to sell 2 million guns; they sold 2.5 million and received invaluable
publicity from the NRA for their $5 million contribution.10
Finally, during hard times quality and brand equity hold up. Being a top firearm manufacturer, the Ruger
brand name will allow the company to endure through downturns better than most companies. The firm’s
customers also tend to be very loyal.
Investment Risks
As we also pointed out with SWHC, there has to be a point in which there is a saturation of guns in the
country. Since 1973, the number of households owning guns has dropped from 47% to 31% (Figure 4). As the
household numbers continue to drop, how long can sales continue to climb?
Figure 5: Percentage of Households with Gun Trend Since 197311
Percent of Households With Gun
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1970
1975
1980
1985
1990
1995
2000
2005
2010
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2015
7
Secondly, although the prospect of federal gun control is all but over for the near term, some states
continue to impose their own and the courts have shown no interest in stopping them. California, for example,
requires pistols to stamp bullets (microstamp) as they are fired. Because of this, RGR has basically stopped
selling pistols in the State; currently only one RGR pistol is on the approved sale list for California. Other states
such as Massachusetts have imposed stricter requirements for handguns. How much these policies will affect
the industry is unknown, but we doubt things will get much worse than the current environment.
The Forward View
Forward View is initiating formal coverage of Sturm Ruger with a Hold rating and a $53 price target.
Ultimately, we think the stock is fairly valued, and the best firearms stock is undeniably SWHC. From a relative
valuation perspective, SWHC is cheaper by all of our favorite metrics.
Figure 6: Relative Valuation Comparison
We also believe that Smith and Wesson’s ongoing efforts to diversify its offerings and become an
outdoor gear conglomerate creates a risk profile that will fall over time. Smith and Wesson is seemingly
destined to be the small-cap version of Vista Outdoor (NYSE: VSTO). Meanwhile, Ruger will remain a pureplay gun manufacturer for the foreseeable future. The company’s Castings segment is a division that sells intracompany with a few outside customers. It’s also unlikely to grow significantly. Thus, Ruger’s fortunes shall
remain tied to the firearms sector with no ability to cushion blows from a volatile industry. Smith and Wesson is
working to develop the kind of flexibility that Ruger lacks.
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Despite Ruger’s focus on gun manufacturing, the company’s margins actually trail those at Smith and
Wesson. We attribute some of the differential to product mix and some to business efficiency. Figure 7
illustrates the two firms’ margins.
Figure 7: Margin Comparison
In summary, Sturm Ruger is a good business with a stock you don’t have a compelling reason to own.
Only small-cap portfolio managers looking for a dividend-paying opportunity should even consider the shares.
Around 40% of quarterly earnings are used for the dividend as the company’s management team doesn’t set a
specific per-share payment. Otherwise, we suggest other investment opportunities in our coverage universe,
including SWHC.
*Note: Sturm Ruger offers absolutely no guidance, and the company’s conference calls are
ceremonial exercises designed to remind everybody that no guidance will be published, referenced or leaked.
We would rather listen to a Smith and Wesson call twice than a Ruger call once. It’s no surprise, then, that
Wall Street has no interest in covering the stock. Look to Forward View for regular updates and analysis of
Sturm Ruger. You’ll not see anybody else publishing detailed research on the company.
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Earnings Estimates and Valuation
(WACC modeling utilized Finbox.io technology)
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Quantitative Analysis
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Sources
1
2016 State of the Firearm Industry
2
2015 State of the Firearm Industry
3
2014 State of the Firearm Industry
4
2013 State of the Firearm Industry
5
2012 State of the Firearm Industry
6
Historic Price Quotes
7
RGR Annual Reports
8
Due to rounding, the figures do not exactly match those in the Annual Reports
9
Concealed Carry
10
Ruger 2 Million Gun Challenge
11
Gun ownership in US
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Disclaimers & Disclosures
Analyst Certification: I, Nathan Yates, certify that the views expressed in this publication accurately reflect my personal views about
the subject companies and their securities. I also certify that I have not, am not, and will not be compensated directly or indirectly in
exchange for expressing any specific recommendation in this report.
Recommendation
Buy
Hold
Sell
Expected Return
Shares are expected to deliver alpha
Shares are expected to match the market's risk-adjusted return
Shares are expected to underperform the market
Required Disclosures: Nathan Yates may or may not own long or short positions in securities mentioned in this report. As a matter of
principal and ethics, he will not trade for three days in any security to be mentioned in any report. Occasionally, the time gap between
a personal trade and an unanticipated event may be less. There is no known affiliate ownership in subject companies of this report.
The firm does seek to sell research descriptions to publication corporations. No other known conflicts exist.
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