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Sturm, Ruger & Co (NYSE:RGR) posted impressive performance figures in its third quarter's earnings release. The company topped both revenue and earnings' estimates. Both gun manufacturers and gun stock investors have been enjoying positive surprises in this election year the same way they benefited back in 2009. In the last three quarters, the company topped all of its earnings' estimates.

The following table shows the results for RGR's third quarter press release.

The significant rise in revenue and earnings over the last 12 months is apparent. We have already discussed why election year normally marks a sharp rise in the sales of firearms. According to most people in the Firearm Industry, in his last term, President Obama was not able to enforce more rigid laws pertaining to gun ownership. However, this time around, many believe that the president will make gun laws increasingly rigid. His intentions were made clear when he opposed relaxed gun laws after every tragic incident involving gun owners from the general public. In the Aurora incident in 2011, 13 innocent people, including Gabrielle Giffords, a Democratic representative, were injured. In fact, President Obama has already reiterated that he would support a reinstitution of the 1994 Federal Assault Weapons Ban.

The sales of guns have been on the rise from the start of the year because the market had perceived in advance that Obama had more of a chance of winning the elections. NICS background check is the best available proxy in the market to gauge the sales' improvement of firearms. The following shows the improvement in these checks:

Bears might think that NICS checks have declined sharply between the first and the second quarter of the year. Although there is no denying the fact that they have declined, they are still up on a YoY basis. In fact, the figures for October show that FBI background checks rose by 18.4% YoY. Also, the background checks for handguns were up by 24.8%. Currently, handguns represent 60% and 68% of the total sales of Smith & Wesson (NASDAQ:SWHC) and RGR, respectively.

Sales were up also due to new product development by RGR. According to the company, the new product range accounted for almost 38% of total sales ($130.3 million) for the nine months ended. New product introductions include:

· Ruger American Rifle

· SR22 Pistol

· 10/22 Takedown rifle

· 22/45 Lite Pistol

· Single-Line revolver

The company also reported a 62% rise in Ruger units passed from distributors to retailers for Q3. The following table shows the overall progress in units sold by the distributors to the retailers for the last three quarters:

Backlog was also on a rise and it rose by 89% and 93% for the third quarter and the nine months ended on a YoY basis, respectively. Production rose by 51% this quarter in anticipation of the increase in demand. The sharp rise in production also shows the increase in production capacity resulting from an increase in investment in building incremental capacity. Capital expenditure amounted to $16 million during the third quarter which represented an 8% rise in the capital equipment base.

Conclusion:

The company pays a healthy dividend yield of 3.39%. The dividend varies every quarter as the company has a policy of paying dividend as a percent of earnings rather than a fixed amount. The current percentage is 40% of net income, and the company has no debt. Cash reserves were up by $24 million from December 2011, ending up at $105.1 million.

Bears, however, are of the opinion that Obama's re-election will push the sales up in the near future for a short-term period. However, in the long run, the Firearms Industry will be at a disadvantage if a stringent set of laws are implemented. It thus becomes apparent why 41% of the total float has been shorted.

However, bulls remain steadfast regarding their point of view. They believe that safety concerns are increasing. Gun usage has gained more acceptance and rising unemployment levels have made people more cautious than ever. Moreover, they believe that a robust backlog will help the company maintain its sales levels as the company's 10-K states that the company recognizes revenue on delivery of firearms. Benchmark claims that political buying of firearms will continue to drive RGR's sales up in 2013 and after that as well. They believe that though Obama is likely to press for the ban on firearms, he will not find much support from the Congress for more restrictive legislations.

Not only this, they also believe that the overall guns manufacturing industry is likely to see long-term organic growth in the future. The industry went through an inflection point in the last couple of years and is all set to grow now due to the following three reasons:

  • Recent new product innovation which the industry had not seen since the 1980s.
  • More liberalized concealed-carry laws throughout the US.
  • Increased social acceptance of firearms usage both for self-security and leisure/recreational purposes.

Due to the forecasted growth in sales going forward and Obama's re-election turning out to be a win-win situation for the Firearms Industry, we recommend the stock as a buy.

Source: Sturm, Ruger & Co: Bulls Win Over Bears For This Gun Stock