Smith & Wesson and Ruger Rise As FBI Gun Checks Surge in March

By Rich Duprey Markets Fool.com

Well, so much for the theory that a gun-friendly president and Congress would shoot down gun sales. The FBI reported background checks for potential gun buyers surged in March and are on track to record one of the biggest year's ever.

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Not surprisingly, the stocks of gunmakers American Outdoor Brands (NASDAQ: AOBC) and Sturm, Ruger (NYSE: RGR) have jumped in response. Shares of the parent of the Smith & Wesson brand are 7.5% higher since the report came out at the beginning of the month, while Ruger's stock is up 6%. The apocalypse many analysts thought would befall the firearms industry following the election of Donald Trump as president seems to have been postponed.

Image source: Getty Images.

Still shooting higher

Gun sales as represented by FBI background checks soared last year to 27.5 million. While not a perfect proxy for gun sales, since someone may buy more than one gun, or be denied, it does tend to track sales closely and is considered a measure of industry demand.

The torrid run-up experienced over the last year and a half was a product of the presidential election. As it seemed apparent Hillary Clinton would win, people purchased firearms ahead of what was seen as the coming of greater gun control. Although no major legislative victories were seen during President Obama's tenure, he was still dubbed the greatest gun salesman ever because of his rhetoric in favor of stricter controls. Clinton was seen as someone who not only would carry forward that legacy, but might actually succeed in getting legislation enacted.

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The upset victory by Trump turned all that on its head. Not only did the firearms industry have a seemingly pro-gun president, but also a Senate and House of Representatives. New gun-control action was largely dead, or would move to the state level.

No gloom and doom

Yet the gunmakers themselves didn't quite see it that way. During their earnings conference calls, American Outdoors' CEO James Debney said rather than an apocalypse, demand was normalizing to historical levels. Ruger's Mike Fifer agreed, saying, "I doubt that the new normal will be materially lower than where we were going before."

And where the industry was heading is ever higher sales.The FBI began collecting background check data in response to the Brady Handgun Violence Prevention Act of 1993. In 2002, it performed some 8.4 million background investigations, which rose to 12.7 million in 2008 when Obama was first elected, fora 7% annual rate of increase. As noted before, it rose to more than double that number last year, or a 10% yearly increase.

Between 2002 and 2008, American Outdoor's sales rose at a 24% compounded annual rate,while between 2008 and its last fiscal year they rose at a 12% annual rate.Ruger's sales were up 4%and 18%,respectively, over those same time frames.

In short, gun sales have been on the increase regardless of who was president, and it was only the special dynamics of the last election that caused them to spike. While the number of background checks conducted over the first three months of 2017 are running about 12% below last year's breakneck pace, they're still 20% higher than they were in 2015, which was a record year itself.

Data source: FBI. Chart by author.

What that indicates is that gun-control legislation isn't the only factor (or even the main one) a buyer takes into consideration when planning to make a purchase. Instead, it only affects the time of his purchase, causing him to buy one sooner rather than later.

The rise and fall and rise of guns

Now there is something to be said for the promotional environment playing a role in the heady growth currently being enjoyed. Gun manufacturers were shipping firearms to dealers as fast as they could make them last year in anticipation of a different electoral outcome and now the dealers have an excess of inventory on their hands they need to reduce. Ruger's Fifer noted the situation "made for a more challenging sell-through environment."

That happened just a few years ago, where, after the spate ofgun buying that followed the mass shooting in Sandy Hook, gun-buying trends largely began to normalize and dealers were left with elevated inventory levels. That led to steep discounts being offered, which spurred gun purchases once more.

There's always an ebb and flow in gun sales, but the cliff analysts were expecting the gunmakers to fall over doesn't appear to be materializing. The stocks of American Outdoor Brands and Sturm, Ruger where sharply beaten down in anticipation, and even though they've gained back some of the value they lost as a result, they still represent underappreciated and undervalued opportunities at these levels.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.