With the election of Republican Donald Trump as president, shares of Smith & Wesson Holding (NASDAQ: SWHC) and Sturm, Ruger (NYSE: RGR) plunged as traders saw any chance of stricter gun control laws or regulations being enacted evaporate. Yet just as pollsters wrongly predicted the ultimate winner of the election, those betting against continued strong demand for guns may have gotten it wrong too.
While a “buy ’em while you still can” mentality certainly drove a lot of gun sales over recent years as campaign rhetoric, political wrangling, and a series of mass shootings fueled the gun control debate, sales were equally propelled by the organic desire among gun buyers to protect themselves, their families, and their property. The high popularity of Smith & Wesson’s M&P Shield handgun models, which were designed for concealed carry, indicates a fair number of people buying weapons were not worried so much about tightening gun control laws as they were about personal protection.
Similarly, last quarter Ruger said the LC9s pistol — another concealed carry handgun — was one of its top sellers, helping push “new product” sales to reach 30% of total revenues. It’s expecting new product sales to have less of an impact on total sales going forward because the LC9s will be dropping out of the category, which covers firearms added to the lineup in the past two years.
So traders focusing on gun control and not personal safety may be missing a big clue when it comes whether demand will fall off sharply.
Smith & Wesson’s stock fell 15% Wednesday, while Ruger was down more than 13%, making both stocks look cheap, though perhaps the former more so than the latter. Smith & Wesson, for example, trades at less than one times its projected growth rate, an indication it’s undervalued, while its enterprise value is a bargain-basement multiple of just 10 times its free cash flow. Ruger, on the other hand, hasn’t provided long-term earnings projections, so we can’t derive a PEG ratio for it, but its EV-to-FCF ratio of 14 makes it cheap too — just not as discounted as its peer.
Just like the analysts who downgraded Smith & Wesson due to state reporting anomalies in the monthly FBI criminal background check system, which led them to incorrectly conclude demand was ebbing a few months ago — until the latest numbers proved people were still rushing to buy guns — the markets are likely wrong about what the election means for gun sales. Given that, the decline of gunmaker stocks makes them even more of an attractive investment at the moment.
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Rich Duprey has no position in any stocks mentioned.
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