Thursday, 13 July 2017

Sturm Ruger (NYSE:RGR): Is there Value in Guns?

Sturm Ruger is an American manufacturers of firearms namely pistols, shotguns and rifles. The company was founded in 1949 and is one of the largest producers of firearms in the states alongside their main listed competitor AOBC formerly Smith & Wesson.

Background Check

I have been having a look at RGR due to the apparent defensive nature of their business. Gun sales tend to rise due to economic fears, terrorist incidents, civil unrest, legislative threats of further gun control and the election of Democrats. 

97% of sales are domestic US so this means the stock is a pure play on American fear;

Gun Sales Rise after Shootings

Gun sales also rise ahead of restrictions - and peak before Christmas

This may also explain why the present moment does not offer the best entry point into RGR. The Republicans are in, there is little talk of new gun control measures and for now the economy is lumbering along. Both RGR and AOBC shares fell significantly on  June 30th after AOBC announced a weak outlook for the rest of the year. 

So I tactically I feel I need a better valuation point or catalyst to really want to own RGR now.

What I like about RGR

It has no debt. RGR runs net cash on the balance sheet meaning it is extremely under leveraged compared to most US corporates. This kind of balance sheet is highly unusual in this day and age and makes RGR significantly more robust than AOBC which is a rather more volatile share. 

Therefore somewhat unusually RGR finance their buybacks from cash:

RGR Annual Report

ROIC is extremely high. The company averages a 10 year median net rate of return of 19.7%. Similarly the 10 year average ROA is over 20%! This company has excellent returns and capital allocation and throws off a lot of cash.

The FCF yield is around 6-7% with no debt and the company pays out a dividend of around 40% of earnings yielding 3%. That dividend has been in place and growing since 2009. In terms of Earnings the PE is 14x last years earnings - which is a good discount to the wider market. 

There is also no ongoing pension liability as the company settled the scheme in 2014;

RGR Annual Report
So this is definitely the kind of stable business that I would consider highly investable for the long term. However the wider sell off in the sector and weak immediate term outlook means the stock may do nothing or trend down for some time.


A quick valuation in my model with conservative growth assumptions (3% revenue growth, stable margins) gives a DCF value around $90 a share which is a good premium to the current value of $60. However it only scores a $45 price target on the DDM model due to the low dividend payout because of buybacks as an alternative capital distribution. 

I think with a turn up in underlying sales this stock could head up towards my $90 estimate but currently there seems little in the way of an immediate catalyst to turn the sales momentum back towards stronger growth. Certainly one to keep on eye on going foward.

Disclaimer: I have no investment in NYSE:RGR at present but may do in future. These are opinions only, not investment advice. If in doubt read my disclaimer.

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