Gun Maker Stocks: a Replay of the Obama Sales Boom?
You would be forgiven for thinking that the United States of America under the Obama administration has become a very, very dangerous place to live. Though the murder rate has actually declined (it fell from 5.4 per 100,000 citizens in 2008 to only 4.7 per 100,000 Americans last year), Americans, it seems, appear to feel a greater need than ever before to defend themselves with firearms.
Thus, sales at the two publicly traded firearms manufacturers, Smith & Wesson (SWHC) and Sturm Ruger & Co. (RGR) have been booming since Barack Obama was first inaugurated nearly four years ago. Profits at the two companies also have soared, with those of Smith & Wesson up nearly 140% over the period while Sturm Ruger’s earnings have jumped nearly 200%. The Obama administration may have struggled to add jobs elsewhere, but employment within the firearms exploded by more than 30% between 2008 and 2011, according to the National Shooting Sports Federation.
While both Obama and his Republican rival Mitt Romney consoled with victims of the Colorado movie theater shootings in July, neither made gun control a feature of their campaigns – and the share prices of both gun makers continued to climb, handily outpacing the return on the S&P 500 index, as seen in the stock chart below.
Moreover, the stocks continued to outperform the S&P even more dramatically as that index began its slide in the midst of earnings worries in the second half of October. The S&P has slumped 2.4% as of yesterday’s close; Smith & Wesson, however, is ahead 6.8%. During the post-election bloodbath, both stocks fared better than the broader market, with Smith & Wesson once again outperforming Sturm Ruger, falling a mere 1%, even though these may well be seen as the consummate “Republican stocks”, likely to flourish more freely under a White House firmly in favor of the right to bear arms.
The argument in favor of owning these stocks is that gun aficionados have been stockpiling weapons ahead of what they fear will be aggressive action by the Obama administration, whether that is in the form of tougher background checks or a crackdown on assault weapons. Is that logical?
Not really. Like most administrations, the Obama White House has witnessed some depressing instances of gun violence: school shootings, workplace rage, the Colorado movie theater attacks of this past summer and, perhaps most stunning of all, an attack that left several dead and severely wounded a member of Congress, Gabrielle Giffords of Arizona, in early 2011.
And yet, tough language aside, there has been no serious move on the part of the president to crack down on gun sales. Absent some still more horrific provocation, and faced with the need to haggle with a Republican-dominated House of Representatives over the budget and tax policy, to oversee the implementation of Obamacare, and find a way to curb not only the official unemployment rate but cut the ranks of the long-term unemployed and underemployed, gun control isn’t likely to make its way to the top of the president’s agenda any time soon.
That being the case, it boils down to fundamentals – and to the extent to which, in the absence of evidence supporting the National Rifle Association in its fears of an imminent crackdown, buyers will keep stockpiling.
The latter can’t be quantified – although at some point buyers will run out of financial ammunition to keep purchasing at higher prices, or hit some kind of logistical barrier in terms of storage space, or begin to assess the risk associated with indefinitely holding a portfolio of weapons that don’t generate returns. The former are mixed. As the above snapshot shows, Smith & Wesson has managed to send its profit margin higher even as its cost of gold sold has climbed.
Still, given the political risk, these aren’t inexpensive stocks, when valued on a trailing 12-month basis. Smith & Wesson clearly expects the trend to remain intact: it recently boosted its forecast for its full fiscal year sales to between $530 million and $540 million from its previous estimates of $485 million to $505 million, citing strong demand. Since as in other parts of the market, it’s a matter of buying on the rumor (in this case, of a crackdown on gun ownership) and selling on the news, it’s probably a safe bet that sales, profits and share prices will all continue to climb in the new year.
Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
Filed under: Company Analysis