Better Buy: Smith & Wesson Holding Corporation vs. Sturm, Ruger & Co.
Gun stocks likeSmith & Wesson (NASDAQ: SWHC) and Sturm, Ruger (NYSE: RGR) took a dive after the U.S. presidential election earlier this month. After all, with President-elect Donald Trump in power,the sales-driving threat of more stringent gun-control laws is effectively off the table for now. So it stands to reason that gun sales could wane, as a result.
To be fair, this doesn't mean that Smith & Wesson or Sturm, Ruger still can't generate market-beating returns for investors. But if you had to choose, which is the better buy today?
Image source: Sturm, Ruger.
The case for Sturm, Ruger
First, consider Sturm, Ruger, shares of which are still reeling despite the company'simpressive third-quarter 2016 resultsreleased the week before the election. More specifically, Sturm, Ruger's revenue climbed more than 30% year over year last quarter, to $161.4 million, while net income per share skyrocketed 66%, to $1.03. These are both stellar growth rates that make Sturm, Ruger shares look like a mouthwatering bargain today trading below 12 times trailing 12-month earnings.
That's also great news for shareholders counting on the company's variable dividend, which Sturm, Ruger uniquely adjusts each quarter to be roughly 40% of net income.
During the subsequent conference call, Sturm Ruger chief operating officer Christopher Killoy -- who is set to become chief executive officer when current company CEO Michael Fifer retires next year -- credited stronger-than-normal seasonal industry demand, "likely bolstered by the political campaigns for next week's elections, strong demand for certain new products, greater availability of rimfire ammunition -- which spurred demand for our 10/22 rifle and other rimfire firearms late in the third quarter, and increased production of several products in strong demand."
As more of a pure play on firearms, however, this also means Sturm, Ruger is more susceptible to the occasionally wild swings of the firearms market. And it's difficult to tell how its picture might have changed given what many consumers viewed as a stunningly unexpected election win by Trump.
The case for Smith & Wesson
By contrast, Smith & Wesson released its own fiscal first-quarter 2017 results in early September, and should be set to announce its latest quarterly report early next month. Given Sturm, Ruger's relative outperformance late in its own quarter as described by Killoy, I wouldn't be the least bit surprised if Smith & Wesson enjoyed similar strength leading up to the election.
What I'm really looking forward to seeing, however, is what happened to firearms demand after the election. For better or worse, though, what Smith & Wesson reveals should also translate to Sturm, Ruger's business.That said, assuming firearms sales have tapered off in the wake of the election, Smith & Wesson has one notable advantage working in its favor: diversification.
Recall that, in 2014, Smith & Wesson went out on a limb by spending roughly $130 million to acquire firearms accessories and supply specialist Battenfeld Technologies (BTI). But that proved only the beginning -- the company has gone on a veritable shopping spree so far in 2016, striking deals in July to spend $85 million to acquire knife-specialist Taylor Brands in July,and $95 million for laser-sighting and tactical-lighting company Crimson Trace, followed by a $32 million agreement earlier this month to purchase survival and camping-equipment company Ultimate Survival Technologies (UST).
If its more broad-reaching strategy was still a mystery, Smith & Wesson cleared it up last week by scheduling a December meeting of stockholders to formally approve a corporate name change from Smith & Wesson Holding Corporation to American Outdoor Brands Corporation. The company further noted the name change has already been approved by its board of directors, arguing it better "reflects the company's expanding strategic focus on the growing markets for shooting, hunting, and rugged outdoor enthusiasts."
This doesn't mean the Smith & Wesson brand will go away. Rather, American Outdoor Brands will merely serve as the holding corporation for Smith & Wesson, Crimson Trace, andBattenfeld, the last of which will house the BTI, UST, and Taylor Brands.
Add to that the fact that Smith & Wesson is also trading below 12 times trailing 12-month earnings and just 10 times next year's expected earnings, and this becomes another equally enticing option.
So which company is the better buy today? I think that depends on your preference as an investor. If you're looking for a pure firearms play that pays a healthy, sustainable dividend, Ruger is the stock for you. But if you'd like a more balanced firearms play that enjoys the complementary growth of related outdoor enthusiast markets, and don't mind a lack of a dividend, Smith & Wesson is on target.
Given Trump's surprise victory, I favor Smith & Wesson stock right now, as it removes the sense of urgency consumers may have had for going out and buying a firearm in anticipation of more stringent gun-control measures. In the end, we should receive fresh perspective on the topic when Smith & Wesson reports next month. But I'm simply more comfortable with its diversified approach at capitalizing on these markets.
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Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.