sparkgap
Absent Comrade
Chart Room
Gun Run Slows, Triggers Misfire
Matt Cavallaro, BetterTrades 08.06.09, 2:15 PM ET
Until recently, sales for gun manufactures had been firing on all cylinders since President Obama's election. The firearms shopping spree has not sparked the kind of earnings windfall many investors had hoped to see and many have been quick to unload their shares.
Will the stock prices of gun makers continue to misfire?
Anxieties arising from the assumption that an Obama administration would target gun ownership with more restrictions led many consumers to gun shops in a quest to bear arms. Despite a recession that took aim at retailers, gun backlog orders peaked in the fourth quarter of 2008.
Larry McMillan's subscribers in July doubled their money in STEC call options and doubled on Citrix Systems calls in June. Don't leave money on the table! Click here for today's and tomorrow's trades in Option Strategist.
Wall Street joined the gun rush last winter, buying up shares from the likes of Smith & Wesson Holding Corp. (SWHC) and Sturm, Ruger & Company (RGR), all while the overall stock market experienced a meltdown. Smith & Wesson stock more than doubled from before the election until the market bottom in mid-March. The rally extended and shot up like a piston this spring, surging to a near-term high above $7 at the outset of May before momentum finally began to cool.
Buoyed by the surge in gun demand, Smith & Wesson realized fourth-quarter earnings of $0.14 per share, topping consensus estimates of $0.12 per share. Revenue also topped expectations, climbing to $99.5 million, a 20% quarter-over-quarter increase.
Tactical rifle sales ignited 195% year-over-year on a big surge in law enforcement sales and sporting goods. Sigma pistol sales jumped 89%, M&P pistol sales grew 27% and Walther pistol sales grew 29%. Backlog peaked at the end of April at $268 million, compared with $50 million in the prior year.
Special Offer: Emerging markets like Brazil, Russia, India and China have doubled in just a few months. Too hot to handle or still screaming buys? Janet Brown's NoLoad Fund*X model portfolio has beaten the market since 1980. Click here for current fund and ETF buys.
Smith & Wesson's gun run may be coming to an end. Investors are certainly pricing in a dramatic slowdown in sales growth. A leading indicator for gun demand is the FBI's monthly data on background checks, which suggests a cooler summer than winter's red-hot demand growth. Immediately after President Obama's election back in November, background checks soared 42% year-over-year. In May, the number of background checks cooled to a 15% increase, signaling that the gun frenzy is subsiding.
Back in June, the gun maker pulled the trigger on a cash and stock purchase of security systems solutions provider Universal Safety Response. The acquisition will impact Smith & Wesson's earnings over the next few quarters. Also, on July 30, Smith & Wesson announced they will offer up to nearly 9.5 million shares in an equity offering that will serve to dilute existing shareholders.
Smith & Wesson trades at just over $6 per share, roughly 20-times projected current year earnings. After crossing below its 10-day exponential moving average on July 28, Smith & Wesson could be setting up to retrace down toward that day's low at $5.83. Such a move would yield 4.5% for short positions.
Shares of Smith & Wesson competitor Sturm, Ruger & Company, producer of rifles, shotguns, pistols and revolvers, have similarly misfired of late. Year-to-date, the stock has nearly doubled and the ride has been starkly less volatile than their chief firearms competitor. But since topping out above $14 per share in mid-July, RGR has plunged to trade near $11.30.
On July 29, Ruger reported a 93% year-over-year increase in revenues as margins rose and the company declared a $0.123 per share dividend. Where Smith & Wesson offers no quarterly shareholder earnings distribution, Sturm, Ruger currently pays out a $0.12 dividend to holders of record, yielding a solid 4.1%. Sturm, Ruger has also been hit by the stark slowdown in weapons demand, but the dividend does offer a measure of protection.
The gun rally seems to be over, with gun stocks looking destined to shoot blanks.
Matt Cavallaro is an equity analyst for the stock market education company BetterTrades.com. Visit BetterTrades.com to learn more timely strategies and tactics for creating cash flow with stocks and options. To contact the author, send an e-mail to [email protected].
