For years there has been a driving force behind the gun trade, more than fears of terrorism and mass shootings. That force has been the fear of much more restricted gun control. President Obama was not successful in his gun control efforts despite the years of gun control rhetoric. There was a stronger belief that Hillary Clinton would been more successful in gun control efforts. After all, Bill Clinton was able to get more gun control. With Donald Trump as president, and with his endorsement by the Nation Rifle Association, the fears of much more restrictive gun control are likely to take a breather in or after 2017. The end result, with some caveats, is likely to be less and less of a gun-craze fueling demand.
24/7 Wall St. has tracked aspects of the gun trade for years. The recent stock price pullbacks in the gun stocks have caught some analysts and investors by surprise. Frankly, it shouldn’t have been a shock at all.
Gun control efforts have continued in California, and that may continue unless executive orders at the federal level change that. 24/7 Wall St. recently tracked the 10 hardest states to buy a gun and the easiest states to buy guns, as well as the 10 states with the most gun violence and the 10 states with the least gun violence.
When Smith & Wesson Holding Corp. (NASDAQ: SWHC) reported its quarterly earnings after the markets closed on Thursday, you already should have assumed that the craze was going to be less ahead. Again, taking the fear out of gun buyers means that they will become far more measured and less rushed to go buy more guns and more ammunition each time there is a shooting incident or on each report of terrorism. If you do not believe this to be true, go do a Google search for “gun salesman of the century” and see what comes up. Hint: it’s not a salesman at the top gun-maker.
Smith & Wesson’s earnings were $0.68 per share on $233.5 million in revenue. The Thomson Reuters consensus estimates had called for $0.56 per share and revenue of $227.61 million. In the same period of last year, the gun maker reported $0.25 in EPS and revenue of $143.24 million. The reason for such a large jump was that Hillary Clinton had dominated the polls that whole quarter, and there was a fear that the Clinton era of gun control would be more likely than President Obama’s efforts. Again, demand pressure.
As for guidance, Smith & Wesson said that it expects earnings to be in the range of $0.52 to $0.57 per share and revenues between $230 million to $240 million for the current quarter. The consensus estimates were $0.59 in EPS and $237.74 million in revenue.
Over the past week, shares of Smith & Wesson dropped by more than 11%, with the stock down 12% at $21.10 on Friday’s close. It has a consensus price target of $28.44 and a 52-week range of $18.42 to $31.19. The shares were trading at $28.45 on November 8, but it was a $3 stock in mid-2011.
If anyone was all that surprised by Friday’s drop, it may be a lack of understanding about the metrics that now drive and have been driving gun demand in recent months and years.
Sturm, Ruger & Co. Inc. (NYSE: RGR) is as closely tied to Smith & Wesson as any company out there. They have the exact same business model, and the market cap of $953 million compares with the $1.2 billion of Smith & Wesson. Again, these companies are almost interchangeable for investors. Shares of Sturm Ruger were down 5.7% at $50.25 on Friday, with a 52-week range of $47.15 to $78.09 and a consensus price target of closer to $80. On a dividend adjusted basis, Sturm Ruger shares were trading at $64.40 on November 8. Its chart shows that it was a $22 stock back in the first half of 2011.