Crowd psychology has again taken over ammunition sales in the United States. Following the 2008 election of Barack Obama, ammunition buyers were driven by fear of new restrictions on guns and ammunition which resulted in a tight supply of ammunition for 2 years. There is, again, a shortage of commercially available ammunition in popular handgun calibers and .223/5.56 caliber rifle (for ARs) similar to the shortage of 2008-2010. A Seeking Alpha author has visited stores, checked the internet, and made some calls to sporting good stores and concluded that ammunition is flying off the shelves again. Indeed, retail suppliers such as Walmart have sold out of these types of ammunition.
Checking online suppliers, such as Grafs, Midwayusa, Brownells, CheapAsDirt, and online law enforcement suppliers have indeed sold out of most popular handgun (9 mm, 40 S&W, and 45 ACP) and rifle (.223 caliber/5.56mm) ammunition. There have even been reports that suppliers at gun shows are even out of these types of ammunition. Local news channels and newspapers across the country are starting to do stories on ammunition increased sales and shortages. Ammunition is flying off store shelves again, in part due to Obama's reelection, but mostly due to the tragedy in Newtown, CT. Does this mass buying and stockpiling of ammunition and ammunition components hysteria bode well for shares of ammunition producers?
Shares in the two publicly traded gun companies, Ruger (RGR) and Smith and Wesson (SWHC) sold off following the Newtown tragedy, as had retailers Dick's (DKS) and Cabela's (CAB). Ruger and Smith and Wesson have rebounded somewhat, but still are below their 52 week highs. Is this an opportune time to buy manufacturers, such as Olin (OLN) or Alliant (ATK), which produce popular small arms ammunition for 9 mm handgun to .223 caliber ammunition for both civilian, law enforcement, and military markets? In hindsight following the 2008 election of Barack Obama and the accompanying ammunition buying and hoarding frenzy, Olin was a buy and ATK was probably not a buy (see charts below).
From Yahoo Finance
However, this time may be different than 2008-2010. The impact of civilian ammunition sales may not be as dramatic as in 2008 because military buying of ammunition will likely continue to decrease. Military use of small arms ammunition is declining, due to the withdrawal from Iraq and the upcoming withdrawal from Afghanistan. Small arms ammunition is a small component of ATK sales and only about 25% of Olin's sales. Furthermore, there is selling pressure from large public pension funds, for example, the NYC pension fund may sell $14 million worth of Olin shares.
However, Olin is a stable company that pays a dividend. Although only a quarter of Olin's sales, ammunition sales from Olin increased 13% year over year in the third quarter, but military sales declined. From Olin's press release:
"Winchester third quarter 2012 sales were $168.8 million compared to $164.1 million in the third quarter of 2011. Third quarter 2012 commercial sales increased approximately 13% compared to the third quarter of 2011 due to higher volumes and improved pricing. Third quarter 2012 military and law enforcement sales declined approximately 21% compared to the third quarter of 2011 due to the timing of military shipments. Winchester's third quarter 2012 segment earnings were $16.0 million, compared to $13.1 million in the third quarter of 2011. The improvement in third quarter 2012 segment earnings compared to the third quarter of 2011 reflects improved pricing and lower commodity metal costs partially offset by higher other material costs and manufacturing costs."
With regard to ATK, it has diverse products, many for the military. For now, the fiscal cliff mandating federal budget cuts including the Department of Defense has been put off for 2 months. Defense spending would share in mandatory cuts. Predicting how defense spending will fare in the upcoming budget process is difficult to predict. Investing in ATK, at best, is fraught with risk and ATK shares have already rebounded after the fiscal cliff deal.
Olin has a PE around 13 and pays a 3.6% dividend. In this investing climate impacted by the political uncertainty over the federal budget and gun control, Olin may be a reasonable anchor for a portion of your portfolio. The last time this happened, it endured from about late 2008 until 2010. Odds are it will happen again for a similar duration or longer because, this time, gun control legislation has already been introduced in the US House of representatives. On January 22, 2012, Senator Diane Feinstein of California will introduce a much touted Assault Weapons Ban. A summary of that ban is on her website. ATK has a PE of about 9 and an annual dividend of about 1%. ATK is fraught with risk, the relatively low PE ratio and dividend do not overcome the risk. Olin shares are a reasonable acquisition with good prospect for at least two years. Temper your decision to buy or not, with consideration that military sales of small arms ammunition may decline over this period. ATK shares remain risky with the upcoming budget negotiations. Although ATK has a huge contract with the Department of Homeland Security for .40 caliber handgun ammunition, that is a small segment of its overall business which may well be impacted by upcoming negotiations on defense spending.
Disclosure: I am long RGR.