Gun Sales Spike Puts Pressure on Smith & Wesson

To say 2013 has been a good year for the firearm industry — as well for as investors of its key companies — would be an understatement.

Shares of Sturm, Ruger & Company (RGR) are up 65% year-to-date, and that’s with the sizable pullback from November’s highs. Smith & Wesson Holding (SWHC) has doled out a 57% reward for shareholders this year, with a big chunk of that coming in just the past few weeks. Those performances are far better than the market’s gain for the year.

Gun salesIt’s not like the gains from Smith & Wesson and Sturm, Ruger have been undeserved, either. SWHC pumped up its earnings to the tune of 16% last quarter, and income is up 60% for the past twelve months. The improvement was largely driven by handgun sales, which were up 27% in the previous quarter. Meanwhile, Ruger is on pace to post a profit of $5.59 per share this year, up 55% compared to 2012′s income of $3.60 per share.

There’s a flipside to the coin, however. Those who follow SWHC stock and RGR stock closely will know that red flags have started to wave recently. Specifically, privately-held Remington Outdoor warned that it saw a serious sales slowdown from 2013′s pace on the horizon for the coming year. And, last month’s pre-gun-purchase background checks were reported to be 10% lower than the number of such checks performed in November of last year.

It’s certainly a mixed message. How should RGR and SWHC shareholders be rectifying them? This is one of the rare cases where the numbers aren’t nearly as important as what’s on the horizon of the legal and social (and pure saturation) landscape.

Gun Sales Fall as Fast as They Rise
It’s become cliche to the point of being cumbersome, but the future value of Sturm, Ruger & Company and Smith & Wesson Holding still hinges on the lingering possibility that the White House could, through legislation, crimp gun sales to the point of making the business unprofitable.

Indeed, the mere threat of such legislation in the post-Sandy Hook world was the reason gun sales perked up in late-2012, and then absolutely soared in 2013 when would-be gun buyers went ahead and pulled the trigger on firearm purchases. The spike in sales was a last-minute rush to own guns before a new law was widely presumed to become law.

Though the proposed Federal law never got any traction, it was undoubtedly a great sales driver at the beginning of the year. The problem: That sales spike created a tough act for gunmaker like SWHC and RGR to follow.

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