Sturm, Ruger & Company: It Might Be Time For Firearms (NYSE:RGR)

Modern Male With Hair Bun Taking A Shot With Gun On Target At Gun Range

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In my writing on Sturm, Ruger & Company (NYSE:RGR), I’ve mostly focused on the fundamentals for the long term. A company that sees this degree of volatility requires careful consideration. It means that when this company is cheap not only seen to a potential, forecasted uptrend but also compared to trough historical valuations, that’s the time the common share can – or should – be bought.

Let’s see if now is the time – because, for the past year, the company has dropped over 20%.

Sturm, Ruger & Company – Firearms prevail

Remember, Guns. Sturm, Ruger & Company does guns.

The company’s production focuses on:

  • Bolt-action firearms
  • Semi-automatic firearms
  • Single-shot rifles
  • Shotguns
  • Semi-automatic pistols
  • Single/double-action revolvers

RGR is the largest firearms manufacturer in the United States. It has revenues of around $654M and a net income of around $88M. This makes the company relatively small – though not unknown. The company employs over 1,800 people. When seen to its relative size and what it represents, the ratio of employees and revenues to market share and company size relative to the sector is pretty amazing.

It’s my intention to emphasize in this article how very disconnected this recent share price action is to 2021 results, with tremendous opportunities in the Marlin brand, shipping its first Ruger-made rifle in December of 2021.

The company brought several other new products to market, including the Ruger-57, the PC Charger, the MAX-9 Pistol, the Wrangler, and several others.

The company also very recently bumped its dividend by almost 9% on a quarterly basis, reflecting the good performance RGR has seen. Some underlying positives included that because the company started 2021 with almost no inventory, virtually all firearms sold in this past year were manufactured in 2021. The company has a very effective/streamlined inventory system, and also managed to bump production by 30% in the company’s factories, despite only a 10% increase in manpower, which of course translates extremely well into manufacturing efficiencies (despite a tight labor market and logistical challenges across the board).

For 1Q22, the company reported net sales of $166.6M which comes to diluted per-share earnings of $1.7. This is a slight decline compared to 2021 numbers for the same period.

Remember when earnings drop that the company actually pays out a portion of earnings, usually fixed, rather than a growing dividend. That means that the dividend can, and does go up and down in line with earnings.

The quarterly earnings weren’t bad as such – if you remember the fact that the drop in earnings actually came to a YoY comparison from truly insane levels of sales – unprecedented, with a start during COVID-19 in 2020. This drop-off resulted in a 10% sales decline for the quarter.

As a result, the company shifted its production mix to allow for refilling the distribution network and its inventories – given that many of these were actually depleted due to the massive amounts of demand. The company prioritized high-demand products, in an effort to optimize mix down the chain. Rather than cutting production, RGR is increasing production of its most popular products and seeks to re-introduce additional Marlin products during the rest of the year. Given the sales volume that Marlin has been seeing, it’s unlikely that the company is resting on its laurels here, but rather seeks to push its sales of Marlin products even further.

The company’s profitability saw some decline due to unfavorable fixed costs due to inflation, materials, energy, communities, services, fuels, and logistics – all of these resulted in a 3-5% margin decline on a gross and operating level – worth considering and requiring price increases.

Still, RGR generated close to $19M in operating cash flow, and holds a current ratio of 5.1 to 1, with no debt whatsoever.

So on that level, there’s plenty to like about the company here, despite the sales decline this quarter.

There are some fundamental risks for RGR worth mentioning. I go through these in my initial article, but they concern some of the more basic things we usually look at. Things like credit rating.

Ruger does not have an S&P credit rating. The company, with its current set of circumstances, has no real need for it. It has zero debt. The company also has the ability to pull on a $40M credit facility, which is currently unused. Aside from that, there is cash and short-term investments of $141M, which is enough to cover any short-term costs the company could face from its current obligations.

(Source: RGR Seeking Alpha Article)

That second number with cash and investments is now over $200M+, making the company fairly cash-heavy.

The second thing remains the company’s overall yield. With the current valuation, this is actually a lot higher than when I first wrote of the company – around 4.3% based on the recent quarterly dividend of $0.68, compared to the previous dividend which would have put the yield at above 5% for the company. This is still a very good yield though, for a company with zero debt and what I consider to be at relatively low risk, despite high volatility in earnings.

So when investing in this business, you really have to be aware of the dividend volatility, the somewhat seasonality of the business, the sensitivity to firearms regulations, and the political climate of the US – as the nation is the company’s only market that matters and likely will matter.

A word or two about the concept of investing in firearms here.

I spoke in my initial article about if you even should invest in firearms in the first place. At that time, I made the clear stance that it was an individual choice.

I choose to invest in firearms, and I have a position in RGR at this time, once again. I foresee a decent upside for this business based on continued strong sales.

I foresee a societal climate changing more towards the volatile and unsafe – and this will be of net benefit to companies in this space. Just as I position myself in line with security/protection companies, military arms manufacturers, commodities companies, water companies, and other things that people need, I choose to position myself with arms manufacturers like RGR.

It makes logical sense to do so.

Sturm, Ruger & Company Valuation

I’ve previously been a fan of investing in the options of this company, given the ease of either getting the company at a very cheap valuation or generating alpha through out of the money-put options selling. At this valuation, I’m shifting my stance towards the more favorable for the company’s common shares.

Why? Well, obviously the valuation is now at a multi-year low of 8.5X. That’s 8.5X earnings for a company that grew 72% in the last year. Now, it’s likely that earnings will decline over the next year at the very least, potentially 2023 as well. Me, I believe that the societal trends will offset this decline a bit, and we might see growth for the next few years following this.

Furthermore, the current valuation implies a significant upside to a 5-year average of just over 15X P/E, implying a price level of $84 for 2023E, which is a significant upside from today’s level.

RGR Stock Upside

RGR Upside (F.A.S.T Graphs)

What’s more, the accuracy for the analysts following this company is actually decently high. 67% of the time, the company beats the forecasts positively here, which means there’s a decent chance, based on historical trends, that we can see the company outperforming in the next couple of years.

I will tell you this, however. Long-term investors in RGR have averaged 12.5% annually, which is almost double the market average for the past 20 years. It seems not unlikely that a similar level of outperformance might be true in the future.

As you can see though, the company’s dividends and earnings do come in at a very choppy pace, with upsides when the world is in peril.

The upside to a historical 5-year normalized P/E for Ruger is no less than 27-28% annually, though this is to 2023, and it’s even following a 32% EPS drop.

In short, it’s very hard to say where the company will go in terms of valuation – but the valuation is very favorable here, even if the company isn’t as blue-chip or as conservative as you might be looking for or wanting to invest in.

My personal ambition is to target companies that have a high likelihood of generating above-average returns of no less than 15% annually. I want safety in the companies that I invest in that means that even in the case that it takes a lot longer than expected for the company to reach its/my goals, my investment doesn’t face the risk of fundamental deterioration – or at least, not a high sort of risk.

It’s my firm stance that while RGR might not be as safe as some of the A-rated companies I invest in, it has through-cyclic fundamental stability hailing from the products it sells and its market position.

There are far worse investments out there than Sturm, Ruger.

That’s why I stick to my “BUY” stance for this company and am planning to double down here and looking to increase my stake in the company.

Thesis

My thoughts on Sturm, Ruger & Company are:

  • This is an absolutely solid business despite the lack of a credit rating and the choppy, volatile earnings and dividend history.
  • If bought at the right price, RGR is a proven candidate to deliver solid Alpha over both short and long periods of time. You’re investing in a timeless segment – don’t necessarily listen to what moral-oriented investors tell you here. As long as humans have been around, we have fashioned weapons to defend ourselves and our loved ones with, as well as for sport. This is a modern iteration of this.
  • RGR is a “BUY” with a PT of $80. As such, I’m not changing my PT here. The upside is even better at the current share price, and I’m planning to buy more here.

Remember, I’m all about:

  • Buying undervalued – even if that undervaluation is slight and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
  • If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
  • If the company doesn’t go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
  • I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

RGR is a “BUY” with a PT of $80/share.

Thank you for reading.

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