How Sturm, Ruger & Company Makes Most of Its Money

Of course Sturm, Ruger (NYSE: RGR) makes virtually all of its money selling guns. What you might be surprised to learn is just what kinds of firearms have allowed it to grow into the largest gunmaker in the country today.

Despite rival Smith & Wesson having about a 100-year head start, Ruger firearms may be just as every bit as beloved as its more storied competitor. Let's find out how it has come to lead the industry.

Lock, stock, and double-barreled

According to the Bureau of Alcohol, Tobacco, Firearms, and Explosives, Ruger produced 1.67 million rifles, shotguns, pistols, and revolvers in 2015 (the latest data available), compared with 1.47 million firearms from Smith & Wesson. It's safe to say those numbers may have grown significantly since then.

In 2015, firearms revenue amounted to $544.9 million. Last year, that figure had surged to $658.4 million, a 21% increase. Even with the industry slowdown that taken hold since the November elections, net firearms sales are only down 12% year over year so far in 2017. And if you compared the first half of this year to the first half of 2015, Ruger firearms sales are actually running 8% higher.

The long reach of the long arm

Unlike Smith & Wesson's parent American Outdoor Brands (NASDAQ: AOBC), which has made a big push into the rugged outdoors market, Ruger remains focused on firearms, producing popular long guns, like its AR-556 modern sporting rifle, and handguns.

The long gun segment is its biggest, accounting for $264.9 million, or 40% of total 2016 firearms revenues. Pistols, like its new Mark IV semiautomatic, represented another 38%, or $250 million, while revolvers accounted for the rest -- some $104.9 million.

Manufacturer Pistols Revolvers Rifles Shotguns Total Volume
Sturm, Ruger 748,364 256,185 662,444 827 1,667,820
Smith & Wesson 989,853 274,136 209,180 183 1,473,352
Remington Arms 36,049 0 774,180 333,442 1,143,671

However, even though Sturm, Ruger is the country's biggest gunmaker by a wide margin, it's only because of its significant long gun business. Smith & Wesson actually makes a lot more handguns -- over 20% more.

BATFE says Ruger made over 660,000 rifles in 2015, while Smith & Wesson produced around 209,000. That figure makes Ruger the second biggest rifle maker in the country behind Remington, which produces virtually nothing but long arms.

Demand remains on its historical track

Obviously, all of those figures likely exploded in 2016 as the biggest year in gun sales. The FBI processed some 27.5 million criminal background investigations of potential gun buyers during that period, 19% more than 2015, which had been the previous record year.

But in 2017, gunmakers including Sturm, Ruger are warning that sales this year will be soft by comparison. Ruger estimates that unit sell-through of its products from independent distributors to retailers decreased 13% in the first half of the year. The industry is awash in guns purchased by dealers ahead of the presidential election. Under President Trump, fears of gun control have subsided. Demand is lower, leaving excess inventory on the shelves, and major discounting is depressing profits.

Sturm, Ruger remains a financially strong company with no long-term debt, but because of the slowdown underway, its stock is deeply discounted, trading at just 12 times forward earnings. Looking the chart above, there's no denying the upward trajectory of firearms demand and sales. It should be just a matter of time before this industry leader returns to growth.

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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.