Here Are 2 Tickets to the Gun Show

03/06/2012 11:11 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

America’s longstanding love affair with firearms is going both barrels blazing, to the benefit of two manufacturers, writes senior editor Igor Greenwald.

If someone tells you the iPad is America’s favorite toy, thank them for playing. If they refer to football as the national religion, suggest they wear a helmet next time.

There’s only one American craze, bubble, and obsession worth discussing at the moment. Bruce Springsteen sings of it. Las Vegas peddles it as entertainment. It shapes our politics and pervades our culture and history.

I’m referring, of course, to America’s long love affair with guns, currently blazing out of all barrels.

Gun sales are booming nationwide: background checks for potential buyers were up 17% in January year-over-year, and 29% higher than two years earlier.

Sales have been on the rise ever since President Obama’s election galvanized fears of sweeping gun bans that never materialized. Obama remains the gun culture’s biggest bogeyman and greatest salesman, this time on the theory (advanced, among others, by the head of the National Rifle Association) of a secret second-term agenda to rip up the Second Amendment.

Some press reports about increased local gun sales also mention fear of local crime, but with the national crime rate at longtime lows, that hardly seems the likely explanation.

More likely, the economic hardships of recent years have bred non-specific insecurities that seem to be soothed best by an underarm holster. Helpfully, with support for gun control at longtime lows, many states have legalized the carrying of concealed weapons, making this form of therapy quite affordable.

Whatever the cause, demand for firearms has seldom been this intense. Leading gun maker Sturm Ruger (RGR) had set itself the goal of selling a previously unheard-of million guns in a year’s time (with $1 from every sale donated to the NRA), but has just raised its sights to 1.2 million based on the sales pace. Sturm Ruger made 23% more guns last year, while its revenue rose 29%.

The stock has rifled from less than $5 in the fall of 2008 to $15 early last year—and, now, $42. And business has been that good, because the debt-free company still sells for just ten times trailing cash flow after subtracting cash on the balance sheet, and offers a 2% dividend to boot.

Of course, Sturm Ruger’s prowess no longer comes as a surprise. Since late November, the stock has lagged behind that of Smith & Wesson (SWHC), which has niftily doubled over that span.

Smith & Wesson craftsmanship continues to command respect among enthusiasts, but it has fallen badly behind Sturm Ruger in lightweight concealable pistols, and is only now trying to catch up.

S&W’s financials remain much messier than its rival’s, a legacy of the company’s checkered management over the years. But it’s finally ditching its low-margin perimeter security business and setting ambitious efficiency targets. S&W gun sales have perked up as well.

And though the stock sells for less than a quarter of what it fetched in 2007, Sturm Ruger’s trajectory shows what can be done with proper marksmanship.

Smith & Wesson reports after Thursday’s closing bell, and investors will be hoping that its forecast for sales growth of 13% to 15% remains on target. It will also need to show progress on the profit front, where it continues to badly lag Sturm Ruger.

But, for the moment, nothing involving guns seems impossible. Properly armed, we’re in control and due every courtesy. Try finding another consumer good that offers that.

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