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Consumer Goods: Gun Stocks Buck the Trend and Welcome 2016 With a Cheer *** INDUSTRY FOCUS *** - YouTube
Channel: The Motley Fool
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Sean O鈥橰eilly: We're talking firearms on
this consumer goods edition of Industry Focus.
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Greetings Fools, I am Sean O'Reilly here at
Fool headquarters in Alexandria, Virginia.
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It is Tuesday January 5th, 2016. Happy New
Year! Joining me to talk firearms is my comrade
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in arms, Mr. Vincent Shen. Happy New Year,
man! How's it going?
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Vincent Shen: Happy New Year Sean and Happy
New Year to all of our listeners!
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O鈥橰eilly: How was your holiday?
Shen: Excellent.
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O鈥橰eilly: Was Santa good to you?
Shen: Yeah sure. If by that you mean I'm a
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little stressed from having a lot of family
in town. Also got engaged last week.
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O鈥橰eilly: What?
Shen: Should have mentioned it to you earlier.
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O鈥橰eilly: Stop the presses. Ladies and gentlemen.
Mr. Shen here popped the question apparently.
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Tell us a little bit before we talk about
something totally different.
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Shen: I fired it off so to speak to her last
week. We were at a cabin out in Shenandoah
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and it was very nice.
O鈥橰eilly: Was it like a New Year's thing
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or what?
Shen: No, it was in between Christmas and
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New Years.
O鈥橰eilly: Okay, yeah. Wow! Congratulations.
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Shen: Thank you. Thank you.
O鈥橰eilly: I need to take you and Gina to
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dinner or something to celebrate.
Shen: I won't turn down that offer.
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O鈥橰eilly: We'll go to Korean barbecue.
Shen: Again, sure.
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O鈥橰eilly: Awesome. Well, long story short
and if our listeners may or may not be aware,
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President Obama is currently in the process
of signing and executive action for basically
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stricter gun control laws. It's kind of a,
we're not going to get into politics here.
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That's not our thing, but it's happening.
Surprising though, it's been kind of good
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for the gun industry.
Shen: Yeah exactly. Yesterday's trading, the
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market kind of greeted 2016 with a little
bit of a chilly reception. The Dow was down
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276 points, 1.6%. S&P shed similar, about
1.5%. One of the worst opening days for the
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market in history. One of the worst.
O鈥橰eilly: It's kind of set off by a week
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of kind of amazing China. They have like a
7% sell off over there.
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Shen: Yeah and it could have been worse too
if it hadn't ... They implemented ...
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O鈥橰eilly: They have circuit breakers. We
don't.
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Shen: ... new circuit breakers. They kind
of do what a lot of the American exchanges
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have now where if the sell off gets tripped
by a certain amount they'll halt the trading,
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which is exactly what happened yesterday.
Then you combine a lot of that uncertainty
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around China, manufacturing, the implications
around that, the implications all over the
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world, plus some new tensions in the Middle
East with a lot of countries stepping away
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from Iran and that basically combined for
a very I guess bearish view at least for yesterday.
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That seems to have continued into today unless
like you mentioned ...
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O鈥橰eilly: Well yeah, they're up again. The
standouts yesterday amidst the sell off were
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all these gun manufacturers.
Shen: Exactly. Specifically ...
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O鈥橰eilly: There aren't many.
Shen: Yeah, there aren't many options here
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in the sector depending on if you're looking
for a pure play gun manufacturer. There's
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of course people who make accessories, ammunition.
If we're looking at Smith & Wesson holding
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company, they're up 6% yesterday. Then there's
also Sturm Ruger up 3% yesterday and we can
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talk a little bit about Vista Outdoor. They're
up 2%. They produce a lot of ammunition. Obviously
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still involved in that industry and tied to
it.
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As you mentioned, why these companies bucked
the trend. We had these executive orders coming
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down the pipeline that are supposed to be
announced officially today. It's around background
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checks, more spending on enforcement, mental
health. Things along those lines, but what
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that has signaled for a lot of gun buyers
in this country is these new regulations.
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We might not be able to get certain guns that
are available now, so buy them now. We should
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buy them now.
O鈥橰eilly: Get them while you can.
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Shen: Exactly.
O鈥橰eilly: Supposedly. They're up even more
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today. This is going to keep, this is very
impressive.
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Shen: Yeah, they're up even more. Maybe because
today is the official announcement. Smith
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& Wesson is again up 13% today.
O鈥橰eilly: Wow.
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Shen: Last I checked Ruger is up 7% and Vista
Outdoor is up 5%. Not all that surprising
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considering what we've seen in the aftermath
of certain political moves. Also tragedies
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where people worry about what is going to
be available. There's a huge surge in demand.
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Again, not trying to hit into the political
side of this too much, but just looking at
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these companies, their businesses, how their
stocks have performed. We could dive in on
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the two main players at least.
O鈥橰eilly: Actually on that note before we
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move on I wanted to point our listeners to
the newly redesigned Focus.Fool.com. There
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you'll discover a special offer to join the
Motley Fool Stock Advisor Newsletter. Start
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have access to a special discount on Stock
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two year subscription. Just go to Focus.Fool.com.
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Take advantage of this offer. Once again that's
Focus.Fool.com. You can see my smiling face
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on one of the photos I think. I think Dylan
is with me.
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Anyway, so we're talking about share price
performances. I mean I don't want to say the
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word bubble, but just like I'm always suspicious
when a stock goes up because of something
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in the news like this. Like right after 9/11
Taser was the stock to own. I don't know,
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but apparently we can dive in a little bit
more here, they've actually been making a
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lot of money. Real money.
Shen: Absolutely. Smith & Wesson, we'll talk
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about them first. They are up almost 200%
since the end of 2012. I feel like that time
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frame in particular is important. That was
the last time President Obama I feel like
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made major calls for more gun control.
O鈥橰eilly: Right.
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Shen: This was after the Sandy Hook tragedy
of course. In 2013 just ended up being a huge
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boon year for these companies. Just to give
you a little bit of context, the FBI, they
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have their NICS background check system. While
it's not a perfect proxy for gun sales in
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the US, it does give you an idea.
O鈥橰eilly: Ball park.
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Shen: Exactly. At least they're trying for
example. The system has been in place since
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1998. They've been tracking this data and
just to give you an idea ...
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O鈥橰eilly: These are people applying to buy
guns ...
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Shen: Each application could be for more than
one for example.
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O鈥橰eilly: Okay. All right.
Shen: It doesn't cover all purchases. Some
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being private party sales, things along those
lines.
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O鈥橰eilly: Gun shows, stuff like that. Yeah.
Shen: Five of its top 10 highest days were
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recorded the most checks were in late 2012.
O鈥橰eilly: Wow.
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Shen: Okay, so five of its highest days were
in late 2012. By far the biggest week in terms
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of checks that they've logged, the FBI has
logged, was between December 17th and December
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23rd of 2012.
O鈥橰eilly: Merry Christmas!
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Shen: Over 950,000 checks.
O鈥橰eilly: I was about to say, was it a million?
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How many was it because I had no idea.
Shen: 950,000 for that week.
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O鈥橰eilly: Wow.
Shen: Then the second record is actual a recent
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week, from last month. It's like 860,000 maybe.
It's a huge difference.
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O鈥橰eilly: Right.
Shen: You also have to keep in mind and we'll
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touch on this a little bit in terms of the
prospects more recently is the fact that people
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were talking about Black Friday, biggest day
ever in terms of new background checks being
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submitted.
O鈥橰eilly: Buy one, get one free.
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Shen: Smith & Wesson, along with much of the
firearms industry, they rode that surge of
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demand into about 2014. Everybody was worried.
O鈥橰eilly: Yeah, then nothing happened, right?
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Shen: No, nothing happened. The stock peaked
at about over $16 per share. That was up 90%
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from end of 2012. Once the panic buying essentially
had tapered off, the stores or a lot of the
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dealers or distributors, they saw their inventory
building up quickly because the fears were
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gone.
O鈥橰eilly: Everybody calmed down. Yeah.
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Shen: Exactly. Those quickly rose and as a
result the stocks struggled actually and ended
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up losing almost all of its gains from that
prior two year period in 2014.
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O鈥橰eilly: Which is my concern again. I'm
just like (sound effect). Anyway.
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Shen: Yeah. The inherent thing that we'll
get to later is the volatility of these companies,
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but not long after it started, the stock bottomed
out, six months later gun control re-emerged
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as a major political issue in 2015. Especially
with the presidential campaigns kicking off
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for a lot of candidates. 2015 again became
a big boon year for this company where the
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stock rebounded 132%. For the new year as
you've seen with these executive orders coming
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down 2016 is looking very, very good for them
as well.
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O鈥橰eilly: What were their revenues doing?
I took a quick glance and in these years where
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the stocks go up it's like revenue is around
50% year over year in a quarter.
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Shen: I'm looking at it quarterly. In 2013
quarters for example, total revenue up 40%
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year over year, 26%. Then after that 2013
surge it quickly subsided. It was down to
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single digits. Then it fell, so by 2014 you
were looking at like a 23, 24% year over year
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drop in revenue. Again, you see ...
O鈥橰eilly: Giving up most of the ...
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Shen: You've seen this big swings in demand
based on honestly not necessarily business
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fundamentals, but ...
O鈥橰eilly: Fair.
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Shen: Exactly. Now the company in its most
recent quarter announced its fiscal 2016 second
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quarter results last month around this time.
It boasted 32% year over year revenue growth.
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Gross margin was up 7.1% point.
O鈥橰eilly: This is a growth tech company
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we're talking about. That's what those numbers
are.
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Shen: Adjusted earnings were up 150%. Just
yesterday probably contributing to the huge
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surge day where the stocks up 12, 13%, the
company raised its sales and earnings guidance
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for the quarter and full year. Fiscal 2016
revenue which ends in April I believe, it's
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expected to come in between 650 and 660 million
dollars while adjusted earnings will be between
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136 and 141 per share. That represents about
19% top line growth and 36% bottom line growth
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if you use the middle of those ranges compared
to 2014. Full year that is.
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O鈥橰eilly: Obviously you've got Sturm and
Ruger. Smith & Wesson is kind of a bellwether
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for industry. How are things looking for them
going forward?
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Shen: Sure, sure.
O鈥橰eilly: Did you come across anything?
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Shen: Looking forward I think the company
honestly it's going to benefit from a lot
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of this uncertainty around this presidential
election because basically the way it comes
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down is if you have a democrat ...
O鈥橰eilly: Right. That's ...
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Shen: ... take office ...
O鈥橰eilly: ... one thing that I was about
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to chime in with. I was like it's crazy to
me sometime show much a presidential election
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can effect a stock. I remember I bought the
stock because Buffet owned it, but it's USG,
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this is like my first stock I ever bought.
I was 16. They make drywall, it's sheet rock.
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It's gypsum. They were being sued for 2.1
billion dollars for asbestos litigation. This
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is the 2004 election. The stock went up double
the day Bush got re-elected just because they
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figured that a republican administration would
be kinder to a company ...
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Shen: More business friendly.
O鈥橰eilly: Yeah. I was like what? I did not
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anticipate that at all. I'm almost wondering
if that's going to happen again in a year
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with these guys.
Shen: Yeah. People are going to come down
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really hard lines. Whether or not there will
be a time of new regulations depending on
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the president, it doesn't even matter. It's
what鈥檚 perceived. 2016, until the run-up,
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until they announce or until the results are
announced there's going to be a lot of uncertainty
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and I think the company will benefit from
that at least for the next year or two. Then
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beyond that if you're looking at just more
of the fundamental business ...
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O鈥橰eilly: It's a coin flip at that point
though.
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Shen: Exactly. Consumers though make up about
90% of the Smith & Wesson business.
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O鈥橰eilly: Do they sell to the government
at all?
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Shen: They do have a huge opportunity there
to increase some of their selling with government
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contracts because ultimately ...
O鈥橰eilly: Ten percent isn't ...
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Shen: The US government is still one of the
biggest buyer of firearms in this country,
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if not the largest. That's definitely an area
of opportunity for them looking forward.
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O鈥橰eilly: Cool. Okay, talk to me about Sturm
and Ruger.
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Shen: Okay, so I want you to look at this
very closely as a mirror image.
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O鈥橰eilly: Okay.
Shen: In terms of a lot of that performance
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in 2013 how things dipped in 2014 and how
they've recovered last year, all of that is
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almost exactly the same. Maybe a shift in
terms of the exact timing, but overall very
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similar. For example Sturm Ruger shares gained
17% in 2013 when revenue was up 40% over the
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previous year. Again, after the fears from
the Sandy Hook tragedy. The stock peaked in
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early 2014, so a little bit earlier than Smith
& Wesson. In that year sales fell 21%. Very
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tough comparisons.
O鈥橰eilly: Yeah, same story.
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Shen: Very tough comparisons. The stock plummeted,
reversed all of its gains, lost about 60%.
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More than the gains it made. It lost 60%.
In 2015 again it roared back 70% on the surge
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and demand. Last November the company recorded
its third quarter results. Recorded third
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quarter results and sales were up 23% year
over year to 120.9 million. Earnings per share
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up 82%. Sound familiar? It's new products
which include all of its major new offerings
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from the past two years made about a fifth
of total sales in the first nine months of
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2015. Obviously ...
O鈥橰eilly: They're still there, yeah.
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Shen: ... their product pipeline is coming
in. It's doing quite well. It's very popular.
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O鈥橰eilly: Cool. All right, so I'm a value
guy. Talk to me about where these guys are
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trading.
Shen: Sure, sure. I know you're going to ask
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me at the end of the show which I think is
better.
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O鈥橰eilly: Of course I am.
Shen: I'm going to preempt that question and
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cover it a little bit. Sturm Ruger ...
O鈥橰eilly: Which stock would Dirty Harry
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buy?
Shen: Smith & Wesson obviously, but Sturm
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Ruger pays 2.5% dividend so it's a little
different because where Smith & Wesson doesn't
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pay one at all. Valuation-wise they're very
similar. I calculated this based off of their
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prices this morning with the surge they've
seen recently because that's likely to continue
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and based off of expected 2015 calendar year
earnings. Twenty-two times for Sturm Ruger,
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21 times for Smith & Wesson. Keep in mind
that Ruger has a really strong balance sheet,
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no debt, they have very strong free cash flow.
O鈥橰eilly: Are these family controlled? I'm
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reaching into the cobwebs here. Do they have
a big ...
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Shen: I do not recall.
O鈥橰eilly: Anyway.
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Shen: They have really strong free cash flow
to cover the dividend payouts. Honestly both
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companies have a very strong name reputation
in this industry. Like I mentioned Smith & Wesson
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21 times, no dividend, but similar strong
cash flow. If you were to ask me to pick,
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I think it's really tough.
O鈥橰eilly: It sounds to me like you'd be
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both and be fine.
Shen: I think you should look not at the companies
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separately necessarily if you're first considering
investing in this industry. You need to look
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at the volatility and the fact that these
companies are not necessarily going to be
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driven by business fundamentals and things
along those lines. A lot of it is going to
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rise in lockstep with each other and a lot
of it is going to be driven by headlines,
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what happens in the political landscape. It's
just tons and tons of volatility. If you're
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okay with that ...
O鈥橰eilly: This has a speculative feel to
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it.
Shen: Exactly.
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O鈥橰eilly: It really does.
Shen: I think for a stock like this or for
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an industry like this taking a truly long
term view is your best bet because trying
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to, I think anybody who's trying to bet off
the election ...
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O鈥橰eilly: Right, so do you want to own these
guys regardless of what happens in the next
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year? Or presidential or anything.
Shen: Then between the two companies you can
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look at that income component that Ruger offers.
O鈥橰eilly: Yeah, that's a surprise. It's
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very reasonable.
Shen: Mm-hmm. Otherwise considering either
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of these, definitely take that long term view
and also just consider the fact that it might
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get hit whether you think that this is doing
well or not. Just with the way events can
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take place, the presidential election and
everything else.
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O鈥橰eilly: Awesome! Thank you for your thoughts
and I'm sure on behalf of our audience once
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again congratulations on the engagement.
Shen: Thanks Sean.
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O鈥橰eilly: If you're a loyal listener and
have questions or comments, we would love
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to hear from you. Just email us at [email protected].
Again that [email protected]. As always,
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people on this program may have interest in
the stocks that they talk about and Motley
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Fool may have formal recommendations for or
against those stocks, so don't buy or sell
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anything based only on what you hear on this
program. For the newly engaged Vincent Shen,
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I'm Sean O'Reilly. Thanks for listening and
Fool on!
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