Alliant Techsystems: the Non-Gun, Gun Stock
Shares of the two publicly-traded gun manufacturing companies, Sturm Ruger & Co. (RGR) and Smith & Wesson Holding Corp. (SWHC) continue to nosedive in the wake of last week’s tragic school shooting, which claimed the lives of 20 very young children and six of the staff at their school. Cerberus Capital Management, under pressure from one of its largest investors, took the surprising step of announcing that it will dispose of its privately-held portfolio company, Freedom Group, which made the rifle that the Connecticut gunman used (after murdering its legal owner, his mother). So why is the share price of Alliant Techsystems (ATK) holding up so well in the aftermath of the Sandy Hook rampage?
The answer may well lie in the makeup of Alliant’s business. Originally a defense industry division of Honeywell (HON), the company was later spun off as an independent business. The lion’s share of its business – more than 75% of its operating profit – comes from its core missile business, including propulsion systems, and fulfilling other military contracts. (These include the sale of ammunition to law enforcement agencies, including the FBI, and to the military.) The company isn’t seen as being part of the “gun industry”, and thus is likely insulated from some of the market’s response to the latest shootings.
This suggests that an investor who wants exposure to the gun industry – which has generated hefty returns as the number of requests for gun permits have soared in recent years – can put money into Alliant without worrying that headlines will wreak havoc on their portfolio. On the flip side of the equation is the fact that the part of Alliant’s business that is growing is most likely to be its sporting group, which includes the sale of small caliber ammunition, gun sights and other accessories. In the just-ended quarter, the company reported operating income in its aerospace group declined 11.9% for the six-month period ended September 30, while defense group operating income fell 2.1%. Operating income for the sporting group climbed 14.8%.
Still, the bulk of that group’s sales don’t come from marketing products to individual gun owners, but to law enforcement agencies. That provides an additional degree of insulation for investors from the current public mood – but it also means that the company’s growth rate and profit margins have been less impressive than those of the two “pure plays” on the individual gun owners’ market.
It remains to be seen whether that will remain the case. So far, at least, the horror in the wake of the Sandy Hook shootings hasn’t taken concrete shape in the form of any new proposals for fresh rules restricting ownership of guns or ammunition, or suggestions for ways to make enforcement of current laws more rigorous. The response we are seeing in the stock market today is more likely to be an emotional one: revulsion at the latest mass shooting in the United States so far this year. (Another shooting in Colorado this week didn’t quite make that list as the eighth incident as it claimed four victims, including the gunman.) To the extent that new legislative initiatives emerge, either at a state or federal level, the stocks that will suffer most are Smith & Wesson and Sturm Ruger; it seems Alliant could emerge as the outperformer in the group. In contrast, if fears of new gun control laws remain merely fears, it is probable the backlog of new orders for handguns – which had shown signs of growing less rapidly in recent months – will soar, propelling profits at Smith & Wesson and Sturm Ruger still higher. If you decide, in the wake of these shootings, that you do still want to maintain exposure to the handgun industry, your view of how to do so will hinge on your belief about what is the most likely outcome.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at email@example.com.
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