With the debate over gun control in the United States being continuous in the last months, and with recent attempts at new federal gun control laws failing, much to the chagrin of the president, gun owners have been stocking up on fears of new restrictions being passed. This stocking up is to the degree that retailers are having difficulty keeping popular firearms in stock, and Sturm, Ruger & Co. Inc. (RGR) and Smith & Wesson Holding Corporation (SWHC), two publicly-traded firearms companies, not being able to produce enough firearms to keep up with demand.
Under such conditions, we have been satisfied investors in Ruger, and we are going to explain our preference for this stock over competitor Smith & Wesson despite excellent performance from both over recent years. Today's analysis will be in a Buffett-esque manner as described in Mary Buffett's book Warren Buffett and the Interpretation of Financial Statements.
All financial data has been taken from MSN Money.
The first noteworthy comparison is their dividends. While RGR has been paying a dividend since 2009 which yields almost 3.3% as of today, SWHC has no dividend.
Both companies have good gross profit margins. As of 2012, RGR is at 36% after a slow increase from 24% in 2008, whereas SWHC has ranged between 29 and 33% over the past five years. While we like the consistency of SWHC to have high margins, the increasing margin of RGR is also of note and there is no clear winner of this metric.
When the selling, general, and administrative expenses are compared, RGR spent 70% of its gross profit in this area, declining regularly to only 38% in 2012. This is in contrast to SWHC, which in 2011 spent 79% of gross profit on these expenses and 61% in 2012. Since 2008 these expenses have fluctuated non-linearly in this range. In this case, Ruger has the clear edge. Smith & Wesson has also spent between 2 and 4 % of its annual gross profit on research and development, whereas Ruger does not have these expenses.
When the net earnings of both companies are compared, RGR has the clear edge; since 2008 Ruger has shown an annual increase in after-tax profit as a percentage of revenue ranging from 9% during 2009 to 2010 to 18% during 2011 to 2012. Every year for Ruger has shown an increase in net earnings as a percentage of revenue, reaching 14% in 2012, their highest margins in recent history. Compare this with a favorite Buffett stock, KO, which was at 18% in 2011. In the case of Smith & Wesson the story is not nearly as nice; in both 2011 and 2009 SWHC showed negative net earnings with no regular trend of increase or decrease.
When the assets to liabilities ratio of RGR and SWHC are compared, RGR is again the clear winner. Ranging from 2.2 to 3.6 with no distinctive trend since 2008, Ruger's assets to liability ratio is always higher than that of Smith & Wesson, for which the ratio has ranged from 1.3 to 1.9 over the last five years. SWHC also has significant long-term debt whereas RGR has zero. The long-term debt of SWHC, as of 2012, could be paid off in three years using annual net earnings.
Finally, when the retained earnings of both are compared, RGR again comes out the clear winner. From 2008 to 2011, RGR increased its retained earnings year-over-year from between 19 and 23 %, only decreasing in 2012 by 27% (but still very strong positive retained earnings in 2012) due to the special dividend paid out at the end of the year. On the other hand, SWHC has not had positive retained earnings since 2008, indicating the far greater ability of RGR to generate cash.
Naturally, investors will have to do their own research, however, based on the above, the far stronger net earnings as a percent of revenue, higher assets-to-liabilities ratio, and higher retained earnings, we believe that RGR is a better stock to hold for the long run when compared to SWHC.