Ruger: Positioned for Election Year Gun Sales
Consumer confidence is high, at least according to the latest reading from the University of Michigan, which tracks it. Inflation has come down, a little, to about 3%, where consumers expect it to remain. Unemployment is low; wages are strong. The market is advancing, which tends to make consumers feel even more flush. This should all be good news, if not great. On top of that, it’s an election year, which tends to buoy stocks all the more.
But: At least two companies that represent discretionary spending have seen their stock price struggle, suggesting that Americans might be a little more iffy about the state of their personal economy than they might be about the whole enchilada.
Gunmaker Sturm Ruger hit a 52-week low recently. Which got my attention and necessitates a brief foray into U.S. firearm sales. Some 1.4 million guns were sold monthly between January and May 2023. For 2022, this added up to 17.4 million U.S. sales, about 12% fewer than in 2021. Gun sales on their own are a $28 billion annual business, with ammunition making up most of the rest of the industry. The firearm and ammunition industry in the US rose from $19.1 billion to $70.52 billion from 2008 to 2021, a compound growth rate of 10.6% – a multiple of overall U.S. economic growth in that period.
Still: Sales are down at Ruger. But that’s true for gunmakes across the board: We can determine this from background check data compiled by the government. Unit sales are down 45.3 from ‘21 to ‘23; background checks overall declined 16.8%. Its market share eroded by two full percentage points in that time.
This fading market position and industry-wide decline didn’t have a commensurate effect on Ruger’s revenue: It posted $543.8 million in sales in ‘23, down only 5.4% from the year before. It did pretty much crater profits, though. Net earnings per share came in at $2.71, a 45.5% drop from $4.96 the year before – which was a 43.5% drop from $8.78 the year before that.
Little wonder the stock’s circling the bowl. The question is what it’s going to take to turn things around and how likely that is to happen at all.
Guns are almost wholly discretionary purchase: Few folks actually “need” one. Gun buyers might have use for three: a handgun, a shotgun and a rifle would serve almost all needs for sporting or home defense. Surprisingly, in this country, that’s about what people already own.
Consider: The U.S. has an astonishing 120.5 firearms per 100 residents. (That’s 393 million guns – nearly half of the total 857 million guns in civilian hands worldwide.) The next closest country on the list, for those of you keeping score at home, is Yemen, at 52.8. But when you subtract young people and the elderly, who tend not to pack heat or go duck hunting, that changes the numbers appreciably. And while plenty of enthusiasts own dozens of guns and plenty more don’t own any at all, the notion that the average actual gun owner has three is statistically valid. If you “need” a gun – you probably already have one. What makes you buy another?
Well, product explains some of it. What do you need? Does Ruger sell it?
Maybe. Ruger makes a damn nice shotgun - its Red Label line retails in the $1,500 neighborhood, roughly comparable to Weatherby, a Benelli or even a Browning Citori. That’s a big jump from a field grade Remington Wingmaster, which can be had for about $600 out of the box. A collector-grade Belgian Browning will set a well-heeled hunter back at least three grand and perhaps five, though that’s a relative bargain compared with a Purdey side-by-side 12-gauge – part of the Forbes Cost of Living Extremely Well Index (a matched pair goes for $340,000).
Ruger rifles are servicable for deer hunting; aficionados or competitive shooters might opt for pricier and more customizable options. (My expert friend pointed out that Ruger’s rifle design makes customization problematic and almost impossible.)
Ruger handguns, however, are decidedly “entry level” brands (on par with, say, Smith & Wesson) rather than aspirational hardware like professional-grade offerings from Glock, Sig Sauer or perennial favorite CZ.
With that lineup in mind, the real question is this: In a country that’s already armed to the teeth, what drives people to buy entry-level handguns? And looking at sales data and recent news accounts leads to some conclusions.
The first sales driver is fear. A fifth of U.S. households purchased guns during the pandemic, including more than 15 million first-time buyers. Americans purchased nearly 60 million guns between 2020 and 2022. So, okay: If aliens land or Putin invades or some wacko steers a jetliner into a building, probably a lot of people will decide they need a gun. “When all else fails to organize the people,” Marcus Garvey said, “conditions will.”
Some sort of national tragedy/calamity is always possible, of course, though my sense is it’s unlikely and certainly not something most people are actively preparing for now. We’ll see.
The other thing that drives sales is the calendar. After all, nothing says Merry Christmas like an AR-15. Just kidding. The stock market tends to rise in election years. And gun sales surge. Gun owners tend to be very sensitive to the notion of gun control, and the idea that a new president will be hostile to gun owners brings these buyers out in droves. They don’t just buy guns – they purchase ammunition, too.
From the L.A.Times in 2000 after Biden was elected: “Higher-than-average gun sales have long been a common feature of presidential election years. But this year’s buying spree is different — and not just because it’s bigger. In previous election years, sales spikes were believed to be driven almost entirely by longtime gun owners who worried that a Democratic president might impose new restrictions on firearms. This time, the sales appear to be driven by fears of societal instability, and gun shop owners and trade groups say the customer base is much broader, including large numbers of Black Americans, women and people who identify as politically liberal.”
The same year, NPR said “gun shops around the country are seeing record sales. Others are offering pre-election sales. Major gun manufacturers Smith & Wesson and Ruger are reporting huge jumps in earnings. In its earnings report, Ruger wrote that the ‘stronger-than-normal industry demand during the summer [was] likely bolstered by the political campaigns for the November elections.’ As large as the recent surge in gun sales is, the trend is not new. Gun and ammunition sales jumped sharply after both of the last presidential elections, fueled by fears that an Obama presidency would lead to restricted access to firearms. Sales have also jumped following mass shootings and moments when gun control rises to the top of the national conversation.”
Hmm. With the race for the White House too close to call, my guess is either that a Biden victory would propel sales to gun owners worried about new restrictions, and a Trump win might cause a sigh of relief among gun owners, prompting them to buy. In either case, societal unrest is still a part of our national psyche, perhaps more now than four years ago. The combo punch is likely strong sales – a significant increase in revenue and earnings and, hopefully, a rebound in the flagging stock price.
Is there any way to investigate this? Sure. While the income statement will always tell you what happened, the best gauge of what’s about to happen is actually found on the balance sheet. Which no one reads. I checked Ruger’s out.
The company never keeps much cash on hand, just enough to operate. Anything beyond that it invests – it has $102 million parked in its accounts, which likely represents investment-grade securities. Conclusion: Ruger allocates money for the best possible return. Smart.
The balance sheet shows the company has been stockpiling raw materials – it has $119 million of the stuff it needs to make guns on hand. But the kicker is its swelling inventory of finished goods – products that are ready to be shipped from the warehouse to retailers. A few years ago, that was just $2.8 million. The next year it tripled, to $7.3 million. Then it tripled AGAIN, to $23.5 million. Now it’s at $30 million. This isn’t by accident. Ruger is positioning for massive election or post-election gun sales. What that says about who will win I’ll leave up to you. But a company that routinely puts all its excess cash to work isn’t going to stockpile raw materials or finished goods if it doesn’t expect a return on that investment. It will park the cash in stocks and bonds and earn money. Inventory doens’t earn a damn thing until it’s sold.
I’ll be dipping a toe in with Ruger. I won’t be surprised if it doubles. Oh. The other company I like that’s primarily in the discretionary category? Harley-Davidson. It’s down 23% in the past year to the market’s 30% gain. More on that later.