Will 2018 Be Sturm Ruger & Company Inc.'s Best Year Yet?

There wasn't a lot Sturm, Ruger & Company Inc (NYSE: RGR) investors will want to remember about 2017. The stock lagged the market and revenue plunged as firearm sales fell off a cliff, highlighted by a 35.1% drop in sales in the third quarter.

Going into 2018, it's unlikely that sales will decline at the same rate as they have in recent quarters, but some headwinds are still ahead. Here's why I think this will be far from the best year yet for Sturm, Ruger & Co.

Why sales won't surge in 2018

In the third quarter earnings report, management gave four reasons for the drop in sales for the quarter. One was a favorable political environment for gun sales, another was retailers reducing inventory, third was competitors pricing aggressively, and the last was that the industry has too much manufacturing capacity.

Inventory and pricing can fluctuate from quarter to quarter, so those are areas that could improve marginally in 2018, but they're not a cure-all for Sturm, Ruger, & Co. The bigger concern is that there is structural overcapacity and demand has fundamentally fallen because of a political environment that leaves gun buyers with very little urgency to spend money. Neither will turn around in 2018 and that'll be a drag on financial results.

Gun sales' biggest driver isn't changing in 2018

The odd reality of the gun business is that sales are driven by the political environment, especially at the presidential level. You can see below that revenue surged more than 300% during the Obama presidency and even shot higher when odds were high that Hillary Clinton would be elected. Since President Trump took office, sales have dropped.

President Trump's term will last another three years so there's no political change coming soon at the highest office in the U.S. Without the threat that the President will push for gun regulation -- whether that regulation is realized or not -- there's not going to be a significant turnaround in sales. That'll make the oversupply an even bigger obstacle and will make it fundamentally challenging improving the top and bottom lines.

2018 won't be the best year yet

Whether you're looking at Sturm, Ruger & Co from an operational or stock standpoint, for the reasons above, I don't see 2018 as the company's best year yet.

On the plus side, Sturm, Ruger & Co still generated free cash flow of $53 million over the past year, despite falling sales, and it looks like there would have to be a long-term decline in demand to threaten the company. So, investors willing to wait for a recovery could find 2018 to be a buying opportunity if the stock dips further.

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