Alphecca

Analyst Says Buy Gun Stocks!

Most gun companies are privately owned but two that aren't, Smith & Wesson and Sturm, Ruger, are being recommended by Jon D. Markman at TheStreet.com:

With Harley-Davidson (HDI:NYSE) backfiring and Coca-Cola (KO:NYSE) in the can, the past year hasn't been the greatest for famous American consumer brands associated with the great outdoors and sunny summer months.

But two U.S. icons have started the season off with a bang. Both are small-caps: Smith & Wesson (SWB:NYSE) , maker of the nation's most popular line of revolvers, and Sturm, Ruger & Co. (RGR:NYSE) , maker of the nation's most popular line of pistols.

There are a number of structural, legal and specific reasons why shares of the country's only two public firearms manufacturers are blazin'.

Let's start with Smith & Wesson, probably most famous as the original manufacturer of the powerful .357 Magnum pistol. This is a company that has had more owners over the past 150 years than your basic Saturday night special, but its latest group of executives appears to finally have it on track. Founded in 1852 by Horace Smith and Daniel Wesson, it passed through any number of hands, including earlier incarnations of the auto-parts makers Lear (LEA:NYSE) and Tomkins (TKS:NYSE) , before merging with a small public outfit called Saf-T-Hammer in 2001.

Shares kicked around the $1 level for a while, then spent three years at around $2 to $2.50 before shooting up to the $4.50 zone in the past three months. The stock went up 13% right after the terror attacks in London. Smith & Wesson's new leaders have expanded its focus from its niche in consumer handguns under the Smith & Wesson and Walther brands -- 80%-plus of current sales -- to take aim at more commercial opportunities in the $2 billion market for U.S. firearms. It has also indicated it will launch a long-gun division -- the industry term for rifles and shotguns. These would be the first with the Smith & Wesson label.

[...]

Trading at a market cap of nearly $240 million, Sturm, Ruger -- run by the 65-year-old son of co-founder William Ruger -- earned $4.1 million over the past 12 months on revenue of $149 million. Shares have fallen 21% in the past year. But amid recent signs of stronger sales of its pistols, rifles, shotguns and precision titanium castings, they're up 35% in the past three months from their May low. The company's balance sheet is a thing of beauty, with $35 million in cash and no debt -- and, remarkably, it pays a 40-cent dividend that provides a 4.6% yield.

Like Smith & Wesson, Sturm, Ruger has positive brand recognition and loyalty among hunters and military buffs. The company is seeking to capitalize on it this year by releasing a dozen new products.

[...]

One reason that prospects are brightening for this pair is that their legal exposure is fading. Barrett noted that lawsuits against gun makers by local governments have repeatedly been dismissed by courts, and laws in 34 states prohibit any action at all. On the federal level, a bill called the Protection of Lawful Commerce in Arms Act -- which would bar future civil action by municipalities -- has been passed by the House but is blocked in the Senate.

Either way, it looks like investors in these two gun makers could shoot the lights out over the next couple of years as long as they exercise a little patience with volatility along the way.

Incidentally, there were some shotguns marketed by S&W a few years ago but I believe they were made by Marlin. I had the chance to buy a used pump-action one in 1999 but passed on it.