Sturm, Ruger (RGR) – A Short Worth Gunning For

Sturm, Ruger (RGR) is one of the key US firearms manufacturers. It sells pistols, revolvers, and rifles and has been in business for more than 70 years. While there are occasional slight shifts in market share amongst the major manufacturers, its sales are mostly determined by broad demand trends in the United States. This is a slowly growing market with the exception of the 2020 demand spike which is rolling over now.

Feelings of isolation and increased violence during the initial stages of the pandemic cause a spike in gun sales in 2020. Gun demand began to recede in 2021 as people began to get out again and felt less isolated. As this trend continues in 2022, gun demand has softened further. Given the rise in inflation and the higher prices for home necessities such as food and gas, I think demand for Ruger guns starting at $500 each will be pinched even more.

Gun purchases can be tracked by the FBI’s National Instant Criminal Background Checks System (NICS) which are submitted prior to purchase of a firearm. The FBI also tracks an adjusted NICS figure which strips out checks on current permit holders. In 2020, adjusted NICS came in at 21 million, an increase of 60% year-over-year. Ruger’s sales in 2020 increased at a 39% pace as its manufacturing couldn’t keep up with demand and the company built a backlog for guns. In 2021, Ruger sales grew 29% but this was in the face of a 12% decline in adjusted NICS as backlog was being whittled down. So far, in 2022, adjusted NICS is down 21% through May while Ruger sales were only down 10% in the first quarter. According to the company, distributor inventories are now pretty well stocked and Ruger sales should track demand more closely going forward.

I am forecasting Ruger sales to decline 14% this year and 10% next year as gun demand normalizes and the last of the 2020 backlog is burned off. Gross margins should also decline slightly to 32% as negative operating leverage should hit manufacturing as fixed costs are spread over fewer units. I am forecasting $5.42 in EPS in 2022 and $3.94 in EPS in 2023. I think fair value is 10x 2023 EPS or $39.40 per share.

What are the risks to this trade? I could be wrong about unit declines, and gun sales could stabilize at a higher level than I am predicting. Right now gun restrictions are being debated in Congress and in prior similar periods sometimes gun sales would rise as people, afraid that they would be restricted from buying guns going forward, rush out to purchase them immediately. Given that current debates center around background checks and mental health issues, it does not seem that any specific type of gun sales will be restricted, so I think a spike in demand is less likely. There is always a possibility that someone will buy the company, but I think that is unlikely given the oligopoly in the market.