Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Coverage Initiation: Sturm, Ruger & Company
Recently, firearms purveyor Sturm, Ruger & Company (RGR) joined the Value Line Investment Survey. The small-cap company is featured in the Recreation Industry alongside Brunswick Corporation (BC), Callaway Golf (ELY), and Harley-Davidson (HOG). Ruger operates in two business segments, firearms and investment castings. With approximately 99% of total sales last year, the firearms segment is the company’s bread and butter. The investment castings business primarily molds metal components that are used internally.
Ruger offers a wide variety of firearms, including: rifles, shotguns, pistols, and revolvers. In the United States, guns are sold through a network of federally licensed, independent wholesale distributors who purchase products directly from Sturm, Ruger & Company. The distributors then resell the goods to federally licensed retail firearms dealers who in turn resell to legally authorized end users. All retail purchasers are subject to a point-of-sale background check by law enforcement. Usually, end users are sportsmen, hunters, gun collectors, people interested in self defense, and law enforcement. In addition, the company exports firearms, but foreign sales have been less than 6% of consolidated net sales in each of the past three fiscal years.
Demand for firearms is unpredictable, and sales tend to be stronger in the first half of the year, reflecting the timing of distributor trade shows. Firms operating in the gun business compete on product innovation, price, and quality. Ruger has increased R&D spending over the last three years, which should continue to benefit its product line, and drive sales going forward.
What’s more, government regulation and politics have a considerable impact on firearm manufactures like Sturm, Ruger & Company and Smith & Wesson Holding Company (SWHC). Indeed, gun enthusiasts have been showing up in droves since the 2008 presidential election, fearing that future availability would be significantly reduced. Although access remains relatively unchanged compared to 2008, sales jumped almost 50% to $271 million in 2009, from $181.5 million the prior year. Likewise, earnings per share increased about 230% to $1.42 in 2009, from $0.43 in 2008. The company posted good results in 2010, as well, earning $1.46 per share with sales of $255.2 million.
Furthermore, Sturm, Ruger & Company’s fortress-like balance sheet will probably provide a solid foundation for expansion over the next 3 to 5 years. With a sizable cash position, the company’s current ratio was an impressive 3.2, and its cash ratio was 1.7 at the end of 2010.
The company pays a quarterly dividend, which was reinstated in 2009. However, the payout policy is somewhat out of the ordinary. The dividend payments are based on quarterly operating results, and fluctuate each period. While constantly changing payments may not appeal to some investors, the policy is very beneficial to Ruger. For instance, if a company that is committed to a certain dollar value payout hits a rough patch, it may choose to forego capital projects that add value to avoid cutting a dividend payment – Ruger would not face such a dilemma.
All told, the shares of Sturm, Ruger & Company have had a tremendous run since late 2008, which ought to attract momentum-based accounts. However, investors should remain nimble, as the company’s strong performance over the last two years may be difficult to top.
At the time of this writing, the author did not have positions in any of the companies mentioned.