Demand for guns is close to an all-time high. With the recent
tragedies in Aurora, Colorado and the temple shooting in Oak Creek,
Wisconsin, gun control proponents are calling for new legislation.
The thinking is that demand for guns increases following these
tragedies. People fear that gun control in one form or another will
limit their ability to own a gun. There is also the idea that what
has been a historic summer of gun violence in Chicago will push the
President of the United States to incorporate some form of gun
control as part of the White House agenda in 2013 should he be
Smith & Wesson Holding Corp
) are the two main stocks that investors use to profit from the
demand for guns. After we go over the attributes of both of these,
we'll take a look at An alternative play in the space.
Smith & Wesson was founded in 1852 in Springfield, MA. They
design, manufacture and sell handguns, M&P Handguns, M&P
rifles and an assortment of law enforcement and military items.
The recent financial performance of the company has been excellent
due to the high demand. Over the last two quarters, revenue has
grown on a year over year basis by 10% and 15% respectively. The
2Q12 revenue estimates are calling for an even greater year over
year increase of 30%.
Earnings have been solid as well with four straight positive
earnings surprises. More importantly, is the growth of earnings
momentum with a pattern of steadily increasing results. The next
quarter, which should be reported in early September is calling for
a small slow down in earnings growth, but there is still time for
analysts to increase their estimates.
The chart below shows that earnings momentum has been solid over
the last several months. The last time the stock saw earnings
estimates this high, the stock was in the upper teens, a difference
in price of approximately 100%.
The valuation for SWHC is a mixed picture. With a trailing PE of
26x, SWHC trades well above the 12x industry average, but when
looking forward the picture looks much better. A 15x forward PE is
only a little higher than the 12.7x industry average. SWHC trades
at a little more than twice the industry average book value. The
price to sales multiple of 1.5x is well below the 2.2x industry
average, implying that there is not that much speculation in this
As we look to the earnings estimates for 2012, we see that they
increased from $0.48 to $0.64 in June. At the same time the
estimates for 2013 moved from $0.60 to $0.77. The implied earnings
growth rate for SWHC is 20% in 2013.
Another supplier of guns is Strum Ruger (RGR). A little younger
than SWHC, RGR is also an east coast based company based in
Southport, CT and founded in 1948. The company also sells a
selection of pistols and rifles.
Like Smith & Wesson, Ruger has seen a solid demand for its
product. The company recently reported earnings that were well
On August 1, 2012, RGR reported revenues of $120 million and
earnings per share of $0.91. Revenues were $17 million more that
estimated for the quarter and showed growth of 50% from the year
ago quarter. Earnings were $0.11 higher than estimated in the
quarter and 62% higher than the earnings reported one year ago.
Over the last several quarters, RGR has been beating the estimate.
A streak of 11 straight positive earnings surprises is just what
investors love to see. In each of the last seven quarters, the
company has beat on the topline as well.
Despite the solid results in the most recent quarter, the stock
sold Off in the session following the earnings release. One
research analyst suggested that the gun ownership theme is now
fully played out.
During the most recent quarter, the company announced that it was
suspending new orders to allow the plant to catch up with demand.
This well publicized event made a few investors question
management, but on the most recent conference call the CEO noted
that the suspension of orders did not effect on production,
shipments, distributors or profitability.
The valuation for RGR is very reasonable considering the massive
amount of recent growth. The trailing PE of 16x is not much higher
than the 12.7x industry average, while the forward PE is even
closer. At less than 15X forward earnings, RGR is attractively
priced compared to the industry average of 12.7x forward earnings.
The book value of RGR is much like SWHC in that it is twice the
industry average. Price to sales of 2.2x, however, is in line with
the industry average.
Earnings estimates continue to move higher for RGR. The Zacks
Consensus Estimate for 2012 recently bumped higher to $3.10 from
$2.97 following the most recent earnings release. 2013 estimates
also moved higher from $2.78 to $2.92.
The Alternative to Guns
With all the tragic shootings of late, there has been a
surprisingly small amount of attention paid to a former high flyer
and alternative to guns.
) was the darling of investors everywhere in 2004 when the company
split its stock no less than three times. The stock started the
year around $7 and ended near $30 (both amounts are split
adjusted). 2005 was not as kind to the stock and it has not seen
double digits since 2008.
More recently, the company reported strong earnings. On July 26,
2012 TASR reported $28 million in sales and $0.06 in EPS. Both were
positive surprises with earnings coming in 200% above the Zacks
Consensus Estimate. Revenue increase 33% from the year ago period
and came in 17% ahead of expectations.
Following the solid results, analysts increased their estimates for
2012 to $0.21 from $0.14, an increase of 50%. 2013 estimates
increased from $0.17 to $0.22 over the same time frame. With only a
few analysts covering the stock, a sizeable move by one could
result in a large move of the Zacks Consensus Estimate.
Valuation for TASR is another story. Trading at 68x trailing
earnings and 26x forward earnings make this a play for not the
faint of heart. The 4x price to book multiple is more than double
the 1.8x industry average, so in line with the gun makers profiled
above. The price to sales is where this one stands out. A price to
sales multiple of 3x compared to a 0.6x industry average shows that
this is home to much more speculation than that of the gun makers.
The tragic and senseless violence we have seen in recent weeks will
drive many to gun control, but it will also push those on the fence
who were thinking of buying a gun. Protection aside, its a supply
and demand game, and demand is high and regulation will undoubtedly
All three stocks are Zacks #1 Rank (Strong Buy) stocks.
Brian Bolan is a Stock Strategist for Zacks.com. He is also the
Editor in charge of the
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STURM RUGER&CO (RGR): Free Stock Analysis
SMITH & WESSON (SWHC): Free Stock Analysis
TASER INTL INC (TASR): Free Stock Analysis
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