Ruger And Smith & Wesson: More Upside Ahead

It has been five months since our last article on Ruger (RGR) and Smith & Wesson (SWHC) was published. In that article, we predicted the outperformance of RGR over SWHC, which has been seen in the past six months; RGR is up over 50% compared to SWHC being up almost 30%. This article will examine whether the thesis of the last article still stands; whether RGR is still the stronger stock, and whether profits should be taken.

The success of gun stocks in recent history has been the result of valid fears of new gun laws, restrictions, or bans as the President has a history of supporting such measures. Such levels of panic buying led to backlogs in orders for RGR and SWHC, but without further political and media pressure for new gun control measures gun demand has decreased. Despite this, RGR and SWHC have performed admirably, with RGR reaching all time highs of around $80/share in late November.

3rd quarter 2013 for both RGR and SWHC saw a decline in revenue of 4.8 and 4.3% respectively. For RGR this was the first quarter of decline in the last year, while SWHC saw an additional small revenue decrease of 0.3% in the first quarter this year. An interesting comparison is between Q3 2013 and Q1 2013, where the latter took the immediate panic buying after the Sandy Hook school shooting and associated push for new regulations. For RGR and SWHC, the increase in revenue was 10 and 25% between these quarters respectively. They both exhibit very similar gross profit margins, ranging from 35-43% over the past five quarters. Despite lower revenues in Q3, SWHC managed to grow gross profit by 6.3% in this quarter while RGR saw a 2.1% decline.

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