Gunmaker Profits Seen Trumping S&P Amid Ban ProposalsBrooke Sutherland
The two biggest publicly traded gun manufacturers in the U.S. are poised to outstrip average profit growth by Standard & Poor’s 500 Index companies as the proposed tightening of regulations after a deadly elementary school shooting heightens demand for weapons.
Smith & Wesson Holding Corp.’s earnings per share may have almost tripled in the three months through Jan. 31, while Sturm Ruger & Co.’s may have climbed more than 50 percent in its most recent quarter, according to analysts surveyed by Bloomberg. That compares with average growth of 9.6 percent among S&P 500 companies reporting fourth-quarter earnings through Feb. 7.
Shares of the two gunmakers have reflected the sales growth, rebounding from declines after the Dec. 14 rampage in Newtown, Connecticut, that left 28 dead. Consumers are increasing firearms purchases as the government considers outlawing some models in an effort to curb violent crime.
“The gun-buying public is not going away,” said Randy Cloud, president of Tulsa, Oklahoma-based Cloud Capital LLC, which oversees $300 million including Smith & Wesson and Sturm Ruger shares. The gun control debate “has ignited enough concern and enough fear in people that want to own guns that they’re going to continue to buy up the foreseeable inventory for a while and earnings will be significantly ahead of previous expectations.”
Smith & Wesson, which is 160 years old, has “thrived and been extremely successful in this highly regulated environment,” Chief Executive Officer James Debney told investors today at the Cowen & Co. aerospace and defense conference in New York. His comments were among the first public statements from a firearms manufacturer since the shooting.
“Whatever the outcome of any legislative change, that will shape our future plans accordingly and we will respond,” Debney said.
Smith & Wesson may post profit for its fiscal third quarter of 22 cents a share, excluding certain items, up from 8 cents a year earlier, according to the average of analysts’ estimates compiled by Bloomberg.
Analysts project Southport, Connecticut-based Sturm Ruger’s fourth-quarter profit rose to 82 cents share, compared with 54 cents in the same period last year.
The companies are benefiting from a record surge in demand for guns after the Newtown slayings spurred legislative proposals including universal background checks and a sales ban on assault weapons and high-capacity magazines.
Smith & Wesson has climbed about 18 percent after snapping a three-day drop following the shooting, while Sturm Ruger has jumped 35 percent. Smith & Wesson rose 1.2 percent to $9.15 at the close in New York, while Sturm Ruger increased 0.2 percent to $54.88.
While the Bushmaster AR-15 rifle used by the Newtown shooter is made by Cerberus Capital Management LP’s Freedom Group Inc., the largest U.S. maker of civilian arms, Smith & Wesson and Sturm Ruger sell similar military-style weapons, according to their websites.
Background checks performed before purchases hit an all-time high in December, climbing almost 59 percent from a year earlier to 2.2 million, according to federal data adjusted by the Newtown, Connecticut-based industry group National Shooting Sports Foundation to eliminate checks not related to sales.
Olin Corp., the biggest U.S. retail supplier of small-caliber ammunition, said last week that its Winchester bullet and shotgun-shell unit had an ammunition backlog valued at $280 million in January, compared with $29 million at the end of
2011. The company projected the sale surge would boost earnings through the third quarter.
“Basically, firearms are flying off the shelves,” Randy Bateman, chief investment officer of Huntington Asset Advisors, which oversees $15 billion including Sturm Ruger shares, said in a telephone interview from Columbus, Ohio. “You’ve got at least maybe a whole year’s worth of positive earnings momentum.”
Analysts’ estimates may fall short of capturing just how lucrative the demand has been, said Peter Zeuli, chief investment officer at Voorhees, New Jersey-based Philadelphia Investment Partners LLC.
“They’ll blow them out,” Zeuli, whose firm oversees $125 million including Sturm Ruger shares, said of the company’s earnings in a phone interview. The estimates don’t “have any handle on” the sales surge.
While much of the growing demand is linked to weapons that would be affected by proposed restrictions, earnings momentum may be sustained at both Springfield, Massachusetts-based Smith & Wesson and Sturm Ruger even if new rules pass, Cloud said in a telephone interview.
Stocks of gunmakers are “a win in pretty much any environment going forward,” he said. “Pick a number. Right now you can have a 30-round magazine. Let’s say you can only have a 15 or whatever it is and some law gets passed enforcing that. People are going to be concerned that there will be, at some point, some other tragedy and some other knee-jerk legislation and they’ll continue to buy whatever is available.”
Another boost to revenue might come from a purchase of parts of Freedom Group, Cloud said. Cerberus is selling the weapons maker after the California State Teachers’ Retirement System said it would review its investment in the private-equity fund in light of the Newtown tragedy.
Smith & Wesson is “definitely a likely” bidder for parts of Freedom Group, Rommel Dionisio, a New York-based analyst at Wedbush Inc., said in a phone interview. Freedom Group’s Remington unit in particular would be a “very good fit” for the company, he said, and with most of the brand’s long-gun business focused on shot guns and bolt-action rifles, “its exposure to potential regulatory changes is fairly minimal.”
And there is always the chance that legislation, if it passes at all, won’t be as comprehensive as the proposals, said Cloud and Zeuli. That would position Sturm Ruger and Smith & Wesson to benefit from the gun-buying surge without needing to modify their business.
“It’s going to be very tough to get laws onto the books that are vastly different from what they are now,” Zeuli said. “It’s a fear and whether the fear is reality or not, that’s up to the future to determine. But at this point in time, Obama’s been terrific for the gun industry.”