3 Gun Control Plays - Investment Ideas
Posted: 8/6/2012 1:00:00 AM
Referenced Stocks: RGR;SWHC;TASR
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 reelected.
Smith & Wesson Holding Corp ( SWHC ) and Strum Ruger ( RGR ) 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 stock.
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 above expectations.
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. Taser International ( TASR ) 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 lower supply.
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 Zacks Home Run Investor service
Brian is also the editor of Follow The Money Trader
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STURM RUGER&CO (RGR): Free Stock Analysis Report
SMITH & WESSON (SWHC): Free Stock Analysis Report
TASER INTL INC (TASR): Free Stock Analysis Report
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