Sturm, Ruger: Zacks’ Bear of the Day Play

America’s gun buying binge is finally over as Sturm Ruger & Company, Inc. (RGRSnapshot Report) reported a double digit decline in sales in the third quarter. This Zacks Rank #5 (Strong Sell) saw earnings decrease 76% from the third quarter of last year.

Sturm, Ruger makes more than 30 American- made product lines with over 400 variations of firearms for the commercial sporting market.

Big Earnings Miss in the Third Quarter

The slowdown in firearm sales appears to have caught even the analysts by surprise despite some gun retailers, like Cabela’s, announcing slower sales over the summer.

On Oct 29, Sturm Ruger reported third quarter earnings of just $0.34, or $0.79 under the Zacks Consensus Estimate of $1.13. They weren’t even close to what the analysts were looking for.

Revenue fell to $98.3 million from $170.9 million in the year before.

The company said the decline in demand for its products accelerated during the third quarter with sales falling 43% and estimated sell-through from independent distributors to retail declining 44% year over year.

However, during the period, consumer demand only declined 3%, if you use the change in the number of background checks conducted.

 

But Sturm Ruger also blamed the larger slowdown on excess inventory at the retail level, its own lack of significant new product introductions.

It said that several of its competitors did aggressive price discounting, which Sturm Ruger did not match, in order to move inventory, and that also hurt sales.

New Market Conditions

Slower gun sales is a new phenomena for the gun makers as they have enjoyed strong earnings growth to record levels in the 6 years since President Barack Obama was elected. Americans started buying more guns after his 2008 election on fears that new gun restrictions would soon be put in place.

Given the weakness in the quarter, it’s no surprise that estimates were cut for 2014 and 2015.

Earnings are expected to decline 26.6% in 2014 and another 6.5% in 2015. Here’s what the expected earnings picture now looks like:

2013 Earnings: $5.58

 

2014 Expected Earnings: $4.10
2015 Expected Earnings: $3.83

Shares at New 1-Year Low

Shares have been sinking all year on worries over slowing sales but they were hit hard after the big earnings miss. They’re at a new 52-week low.

Sturm, Ruger is now trading with a forward P/E of 9. That makes it very cheap on a valuation basis.

But investors will likely have to deal with shrinking earnings through 2015.

If you’re looking to invest in the firearms industry, you’re really stuck right now. All of the gun makers will be exposed to the same softening demand conditions.

Sturm, Ruger’s competitor Smith & Wesson (SWHCSnapshot Report) is currently a Zacks Rank #3 (Hold) but it will not report earnings until the beginning of December. Earnings are already expected to decline by 37.8% in fiscal 2014.

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

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