Why Gun Sales Are Powering Investors’ Portfolios

Posted by jhingarat21 on 23rd Oct 2015

LAKEWOOD, Colorado — Every Tuesday evening is ladies’ night at BluCore Shooting Center, a gun range near a busy intersection in this Denver suburb that looks out onto the foothills of the Rocky Mountains.

In addition to selling shooting time and offering training, the front of the store is full of for-sale rifles, handguns, shotguns, ammunition and accessories – including women’s purses designed to carry a concealed weapon. One brand is called “Concealed Carrie.”

“There is a trend toward new shooters, female shooters,” says BluCore business operations manager Bruce Peterson, talking over the concussive din of live fire from the downstairs range. While some are the likes of nurses who work late shifts and have to walk long distances to their cars, other women are preferring larger firearms that are easier to control than those that can be easily hidden in a purse.

The increasing number of women shooters is just one of the trends that has been boosting gun and ammo manufacturers. Some people are looking to arm themselves after several mass shootings this year. Those shootings – including one in Oregon this month where the gunman killed eight people and himself – have also prompted President Barack Obama and Democratic presidential front-runner Hillary Clinton to spotlight stricter gun control.

The call for more gun control laws “has made some consumers stock up on guns and ammunition before any new regulations come into play,” says Maksim Soshkin, defense sector senior analyst at IBISWorld, an Australian research company.

Through September, the number of background checks initiated through the Federal Bureau of Investigation’s National Instant Criminal Background Check System has increased 2.3 percent. But they have been increasing at a faster rate since May, with September showing a 23.3 percent surge. Although there isn’t a one-to-one correlation between checks and sales, the NICS data do provide a forward-looking indicator of firearm sales.

Against this backdrop, Massachusetts-based firearms manufacturer Smith & Wesson Holding Corp. (ticker: SWHC) is up nearly 97 percent so far this year while competitor Sturm, Ruger & Co. (RGR) is up more than 71 percent.

Ammunition makers like Vista Outdoor (VSTO) and National Presto Industries (NPK) – although less of a pure play on firearms because they manufacture other consumer goods beside ammunition – are also up by double-digit percentages. An exception is Olin (OLN), which is primarily a chemical company, in addition to making ammunition. Although its stock price is down, the company’s second-quarter Winchester ammo division sales rose 7 percent to $194.2 million.

It’s a similar situation to what happened after a 2012 shooting at an elementary school in Connecticut prompted calls for a ban on certain types of guns and magazines, leading to a run on gun stores. But those fears faded as legislation did not materialize. The gun industry was left with a sales vacuum, as enthusiasts had already made their purchases.

Now, gun makers are in a “sort of a recovery,” says Rommel Dionisio, managing director of equity research with Wunderlich Securities, who follows firearms stocks.

He thinks there could be a pickup in demand in the coming months driven by a “flurry” of expected new products. Fear of stricter rules on assault rifles, also called modern sporting rifles, or high-capacity pistols could also prompt gun buying over the next few months, he says.

Over the last three months, inexpensive handguns – around $300 a pop – that work well as concealed weapons have been flying off the shelves because people want a sense of personal security and because of fear of what happens if a Democrat wins the presidential election and tries to “chip away at gun rights,” says Brian Ruttenbur, equity analyst with BB&T Capital Markets, who follows the firearms industry.

Sturm, Ruger & Co. is Ruttenbur’s favorite gun stock. He sees it benefiting the most in terms of profitability, noting it has the capacity to pump up production at a factory in North Carolina.

Meanwhile, he says, Smith & Wesson has been discounting products to gain market share. “This is a time to be owning the stocks,” he says.

Soshkin says the politically spurred buying won’t be a long-term trend.

“While gun manufacturers are benefiting right now, the recent jump in sales will probably not last in the longer run,” he says, noting that the surge in gun sales a few years ago dried up when stricter gun measures weren’t passed. He doesn’t see this time around being any different in terms of legislation.

He notes that background checks in 2014 fell for the first time in more than a decade and that the overall 2.3 percent growth so far this year “is far below previous surges, indicating less room for rapid sales growth.”

Although conflict in the Middle East and geopolitical tensions in Asia will boost military exports, overall, Soshkin sees the industry in the coming years having to deal with normalizing consumer demand and weakness in the defense market.

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