Will Sturm, Ruger Miss Out on a Gun Sale Boom?

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Sturm, Ruger (NYSE: RGR) has been the biggest winner since Wall Street realized that the firearms industry isn't actually in trouble following President Trump's election. Shares of the gunmaker have soared over 25% in the past three months and are up over 40% from their 52-week low.

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Gun sales are growing, and it appears they will continue to do so. But because Ruger recently announced a full recall of one of its most popular firearms, the gunsmith may miss out on some of the demand.

Bad timing

That's why the total recall of the Mark IV line is so inopportune for Ruger. The gunmaker says that all Mark IV pistols manufactured before June 1 have a risk of accidental discharge. If the pistol's safety is somewhere between "safe" and "fire", and the trigger is pulled, the gun won't fire. But if you then move the safety to the fire position, it could discharge at that point without further action.

It notes only a small percentage of the pistols are affected by this manufacturing defect, and no one has been injured as a result of it, but out of an abundance of caution, the company wants to retrofit all of the guns it produced. That's a smart move on its part, but the recall is likely to shake consumers' confidence in the Mark IV and push at least some buyers to competing products.

Constant progression

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Unfortunately for Ruger, the Mark IV pistol was one of the company's most important new products when it was introduced last September. The semi-automatic rimfire pistol was a serious, evolutionary upgrade to a family of firearms that has been around since the company's founding. Moreover, because American Outdoor Brands (NASDAQ: AOBC) had introduced its competing entry-level and highly configurable Smith & Wesson Victory 22 pistol, an update to the Mark IV was a particularly welcome addition.

Perhaps the greatest advance Ruger made was the one-button takedown, which makes disassembly and reassembly of the pistol a breeze. Ruger reports that the No. 1 complaint it received about the Mark III was that is was tough to reassemble. They also added an improved magazine release that makes it exceptionally useful in competition shooting, as well as a number of "cool factor" additions, including barrel shroud venting. The market responded with a surge of demand such that there was, at least initially, a heavy backlog of orders for the Mark IV.

New and improved

New products have always been an important component of Ruger's business, accounting for 29% of total sales last year and 25%, or $41.5 million, in the first quarter.

Ruger considers a firearm a "new product" for the first two years after it is introduced, so while big bottom line contributors like the LC9s and AR-556 will continue to be important offerings, they're not part of that product category any longer. The Mark IV, however, should have picked up the slack. Gun buyers have been out in force based on the rising background checks recorded last month. The FBI said it conducted a record number of checks in May.

The effect the recall will have on Ruger's financial results should be limited (barring any other issues). Last year, one of Smith & Wesson's most popular rifles, the M&P 15-22, was banned from use at one of the country's premier rifle marksmanship programs due to accidental discharges. Although the issue was discussed at length in the firearms community, Smith & Wesson seemingly ignored it without any blowback. No recall was ever issued for the rifle -- Ruger is at least working quickly to address the problem.

In any given year, American Outdoor Brands has around $3 million to $4 million in warranty claims submitted for its firearms, suggesting the financial hit from the recall itself shouldn't be debilitating for Sturm, Ruger. But given the gun buying surge currently underway, it's not a good time to be sitting on the sidelines.

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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.