Ruger’s upcoming quarters

This is a speculation on my part, but I think that Q3 and/or Q4 will be good quarters for Ruger.

  1. Adjusted NICS data is recovering and catching up to the very high levels of 2013.
  2. Ruger has introduced many products in Q3, the most notable one being an entry-level AR-15 rifle.  2014 Q1 introduced 1 new model, Q2 introduced 3 new models, while Q3 introduced 7 new models.

While I don’t like short-term trades, this may be a compelling short-term trade because the next two quarterly earnings releases may serve as a catalyst.  The April 2015 call options may be a way to play this because the implied volatility is very low (below 30).  There are a few long-shot scenarios that could cause the options to go up several times in value.  If Ruger demonstrates earnings growth, the stock’s multiple could go from 9.5 to a growth stock multiple like 15-20+.  Or, there could be a short squeeze because the short interest in Ruger is extremely high (those who own call options could randomly get lucky).

Overall gun demand

Adjusted NICS data

historical-NICS

Click the image above for a larger image. Visit NSSF.org for original data.

January 2014 was a terrible month for the gun market as sales were -46% year over year.  Demand has since been catching up to 2013 levels.  September 2014 demand was down only 1 percent compared to last year.

If the long-term trend of increasing popularity in guns continues, then the overall market will grow.  The demographics of people who are into guns as a hobby is getting bigger.  More women and minorities are getting into shooting and buying (multiple) guns.  Parents are also taking their kids to the shooting range as a family activity.  The NSSF has an interesting infographic:

Google Trends

Google Trends data shows a slightly different story than my narrative.

google-trends-gun-popularity

Interest in the search term “gun shop” seems to correlate best with adjusted NICS data (see page 3 of this PDF on the NSSF website for historical data on a monthly basis).

Interest in guns reached an all-time high in November 2012, a month before the tragic Sandy Hook shootings.  Sandy Hook panic buying does not explain record demand in November 2012.

December 2012 was the peak month for gun demand.  Demand typically peaks during and after Christmas each year anyways, so it’s unclear to me how much was driven by Sandy Hook and how much by natural holiday buying.  Since then, interest in guns and gun shops has been on a slow decline.  Q2 of 2014 was an extremely weak period for gun demand, which is reflected in Ruger’s sell-through numbers.

Google Trends also shows that no country matches America’s obsession with guns.

However, I would caution that Google Trends data can be a little screwy.  The Google Trends data for “Ruger” correlates extremely poorly with Ruger’s revenues as reported in SEC filings.  In my opinion, Google Trends data is not very reliable.

Ammo sales

Ammo sales are presumably driven mainly by people shooting their guns for fun.  People using guns for other purposes (law enforcement, hunting, self defence) presumably buy very little ammo.  Not everybody buying ammo consumes it right away.  Because there have been ammo shortages in the past few years, some people buy ammo for hoarding purposes.  However, ammunition sales should reflect overall recreational interest in guns.  Ammo shortages and sales in the past few years suggest that gun popularity continues to increase.

I think that the recreational interest in guns is what ultimately drives Ruger’s sales.  There is a lot of ‘noise’ in adjusted NICS data because there are shorter-term events that can cause panic buying due to fears that politicians will ban certain types of guns.  There are also mini-bubbles where consumers go crazy about buying guns due to fears of shortages (which in itself causes a shortage).  This is perhaps an explanation for the gun boom from November 2012 to the beginning of 2013, especially in the modern sporting rifle market.

Vista Outdoor is a planned spinoff of Alliant Techsystems.  It files with the SEC.  Its form 10 filing states that the company has been ramping production in response to unprecedented consumer demand:

The increase in Shooting Sports net sales in fiscal year 2014 compared to fiscal year 2013 was driven primarily by increased ammunition sales, including increases of $300,800 in centerfire ammunition sales, $35,400 in rimfire ammunition sales, $23,900 in shotshell ammunition sales and $20,900 in primer product sales. Increased centerfire ammunition sales were due to increased volumes resulting from greater supply from the Lake City plant. All ammunition sales were driven by strong market demand for ammunition and a previously announced price increase.

The form 10 filing also states that the latest quarter (ending June 29, 2014) has seen a year-over-year increase in sales.

Convention / gun show attendance

The National Rifle Association and National Shooting Sports Foundation both put on conventions, which are the largest gun shows in America.

A NSSF press release states that their convention had increased attendance this year:

The 36th SHOT Show ran Jan. 14 to 17 at the Sands Expo & Convention Center. Attendance figures eclipsed last year’s total by the second day of the show and finished at more than 67,000, an increase of 5,000.

PAGunBlog.com has an interesting graphic on the attendance for the NRA’s convention:

Their convention saw a YoY drop in attendance, though the overall trend has been going up.

New product introductions

Below is a list of the press releases for new models on Ruger’s website.  Starting from Q3 2013, the number of new model press releases in each quarter was 1, 3, 1, 3, and 7.

Q3 2014 (7 press releases)

Ruger Introduces the AR-556 Modern Sporting Rifle
September 29, 2014

Ruger Introduces Ruger Collector’s Series 10/22 Carbine Rifle
September 24, 2014

Ruger Expands the Popular Line of Lightweight Compact Revolvers with the Addition of the 9mm LCR
September 22, 2014

Ruger Adds to the Ruger American Rifle Bolt-Action Centerfire Line with Left-Handed and Ranch Models
September 15, 2014

Ruger Gunsite Scout Rifle Now Available In 5.56 NATO
September 08, 2014

Ruger Introduces the All New, Striker-Fired LC9s Compact 9mm Pistol
July 29, 2014

Ruger Expands the SR-Series Line of Pistols with the Value-Priced “Essential” 9E
July 10, 2014

Q2 2014 (3 press releases)

Ruger American Rimfire® Line Now Includes Threaded Barrel Models In Three Calibers
June 24, 2014

The Popular Ruger American Rifle is Now Available in Predator Models
May 15, 2014

Ruger Commemorates the 50th Anniversary of the 10/22® ( 10/22® 50th Anniversary Design Contest Winning Rifle )
April 24, 2014

Q1 2014 (1 press release)

Ruger Introduces the GP100 Match Champion Double-Action Revolver
January 08, 2014

Q4 2013 (3 press releases)

Ruger Expands the Popular Line of Lightweight Compact Revolvers with the Addition of the LCRx
December 18, 2013

Ruger Announces Redesigned Red Label Over-and-Under Shotgun
October 24, 2013

Ruger Introduces the SR-762 Piston-Driven Rifle Chambered in .308 Win./7.62 NATO
October 17, 2013

Q3 2013 (1 press release)

Introducing the Ruger American Rimfire Series
August 29, 2013

Significant new products

The least exciting new models are guns that offer new calibres or offer minor variations on existing models.  In Q3 2014, Ruger released two guns that aren’t minor variations on old products.  They should help Ruger break into new niches and expand market share.

AR-556

The Ruger AR-556 is an entry-level “modern sporting rifle” that is compatible with the AR-15 platform.  AR-15 parts from different manufacturers are interchangeable.  From reading what customers are saying online, here’s what I can figure out.  The AR-556 will go head to head with the Smith and Wesson M&P 15 Sport, which will have a street price roughly the same or slightly higher than the AR-556.  The AR-556 has slightly more features because it has a dust guard and forward assist.  Basically, Ruger is trying to price its product so that it has slightly better value than the competition.

Keep in mind that this gun fills a niche within the AR-15 market.  Some people prefer to assemble their own AR-15 from parts because it is cheaper.  Others prefer higher-end AR-15.  And yet other gun enthusiasts were a little disappointed that this was Ruger’s new gun because they don’t want an entry-level pre-assembled AR-15.

Because this is a new product, it is somewhat unclear if the product has issues to work out.  In the past, Ruger has had to recall new products just like every other manufacturer.  Their website lists their product recalls.  (Some manufacturers ignore minor problems and don’t recall their guns.)  I believe that Fifer is aware of this and has been making sure that new models are thoroughly tested before mass producing them and sending them to distributors.  Here’s a snippet from last quarter’s conference call (transcript):

Andrea James – Dougherty & Company

[…] Mike, can you talk about what’s going on with some of the delays in your new product introduction? You historically have been really good at that, and it sounds like you’ve been having some trouble since the beginning of the year

Michael Fifer

Andrea, I don’t think the troubles or challenges we face are any different than any other new product introduction. It’s just all the sine waves have merged together and we’ve, unfortunately, missed the planned launches we had for first and second quarter.  However, we’ve got a lot of great products stacked up and we’re pleased to have launched the LC9s yesterday. I noticed that on all the forums and boards, it’s getting a lot of attention. People are pretty excited about it, especially when they see the graph of the dramatic improvement in trigger pull.

And keep in mind that Ruger is known for very rugged and reliable products. They’re safe. They operate well. We’re very proud of them. And we do extensive testing that I think goes well beyond anything our competitors do. And in the process of that testing, we find things to improve. And we want to improve them before the consumers find them and decide to improve them.

As you may know, one of our large competitors just had a very unfortunate and embarrassing situation where they had to recall an entire pistol product line and they don’t have a fix for it and they’re promising maybe some months in the future they’ll send a replacement gun to each person who owned one.

We’re not going to do that. We’re avoiding that by really putting these guns through the ringer.

You may recall from an earlier conference call, I said there was one gun we launched only a year after we’d originally planned and only after an additional 600,000 rounds of testing went on. So we make doggone sure our guns are ready for market when they come out.

This new model may very well sell very well and take a lot of market share from Smith and Wesson (and other competing guns) in the entry-level market.

LC9S

The LC9S is a handgun for concealed carry.  It is like the original LC9 but with a better trigger and a higher price tag.  This is another new model that should sell well.

Manufacturer rebates

Ruger may or may not be having some short-term problems in moving old inventory for its LCP and SR22 handguns.  It is currently running promotions that essentially discount the price of these guns.  Purchases between August 28 to November 30 are eligible for free ammo and a magazine.

What I’m doing

Unfortunately for me, Ruger’s share price has dropped dramatically since my first writeup on the company.  In hindsight, perhaps I should have paid more attention to adjusted NICS data and seen the temporary collapse in gun demand coming.  In the long run, I think that Ruger has a bright future ahead of it.  In my opinion, Michael Fifer is an extremely talented CEO.  He has been extremely good at squeezing efficiencies out of Ruger and constantly improving Ruger’s manufacturing processes through lean methodologies.  He has his mechanical/design engineers work in the same building as manufacturing so that they understand how they can change gun designs to increase manufacturing efficiency.  In the long run, I think that Ruger deserves a higher P/E multiple (e.g. 20+ versus the current multiple of 9-10) to reflect its growth and extremely high returns on capital (return on equity is 81% with no debt).

In the short term, I think that the coming 2 quarterly earnings releases may act as a catalyst for the stock trading higher.  Adjusted NICS data shows that overall demand is picking up again.  Here are the figures for year-over-year changes in adjusted NICS checks:

  • Q4 2013: -19.45%
  • Q1 2014: -29.78%
  • Q2 2014: -11.87%
  • Q3 2014: – 2.6%

If the ongoing trend in increasing gun popularity continues, it is likely that gun sales will follow.

Within the overall gun market, Ruger will likely continue to gain market share as it has done in the past.  Its new product introductions in Q3 should drive increased sales in Q3 and Q4.  In particular, its AR-556 and the LC9S are fairly major new products that should be very popular among consumers.

Because the shares are expensive to borrow, you should strongly consider getting paid to lend out your shares to short sellers.  Or you can look at the options market.  If you live outside the US (I am Canadian), options are a way of avoiding withholding taxes on Ruger’s dividends.

*Disclosure:  I am long RGR call options.  No position in the common stock.

Links

14 CEOs On What Makes And Breaks A Best Small Company -This article briefly talks about how Michael Fifer worked at gun shops to understand the customer.

The Firearm Blog review of the AR-556 – In particular the comments are interesting.

Reddit.com / M&P 15 Sport vs Ruger AR-556 – Reddit’s r/guns and r/ruger are good places to look for consumer discussions on Ruger products.  You can use Google to search reddit.com (e.g. Google “site:reddit.com Ruger”).

VIC / short thesis on Ruger – I’m not a VIC member but I asked the author for a copy.  It’s always good to know what the people on the other side of your trade are thinking.

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6 thoughts on “Ruger’s upcoming quarters

  1. How can you write an update on Ruger and only use the word “inventory” once? The crux of the issue is at the margin, and high inventories will drive EPS downward.

    You may be right in a couple quarters, but I think you are early and more inventory correction needs to take place.

    • Ruger wants to build more inventory at their warehouse/factories and at the distributors and at the retail level. That way stores can have a steady supply of Ruger product and won’t run out of stock, ensuring the highest level of sell-through at the retail level. Because of the gun boom craziness, Ruger wasn’t able to achieve ideal levels of inventory in their channels. The problem is not inventory. It is that stores were selling fewer Ruger products and other guns due to the lower gun sales in the past four quarters.

      As the demand slump works its way through the system, things will get back to ‘normal’.

    • Michael, I think you’re right- normalization of sales are going to depend on whether or not RGR can pressure distributors into keeping larger inventories. However, with that said, looking at sell-through to Retail vs. NICS data I would guess that retail inventories are probably pretty thin. Though it’s a poor proxy, NICS data is only off about 3% from last year. If retailers and distributors can move a similar amount of product as last year (I’ll let you do the math) surplus inventory could be absorbed over the next two quarters easily.

      • In the past, distributors did not have excess inventory because product was flying out of their warehouses.

        If there is a problem with inventory, it is that there was too little inventory at the distributor level.

        The problem in the last 2 Qs was demand / how well Ruger products are selling at the retail level when they have to compete with panic discounting and less shelf space.

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