Sturm, Ruger & Co. Print a Perfect Q2

Sturm, Ruger & Company (RGR) printed a perfect Q2 as revenues (+93% y/y), margins (19.3%, +400bps q/q), cash flow, and a dividend increase all well exceeded even optimistic expectations. Operating margins of 19% were extraordinary as management has strived to reach 15% for 3 years.

Interestingly, backlog did not decline much and is still at effectively record levels due to Ruger's strong new product sell through and demand. Declining demand was a key piece of the weak short sale story that has been overwhelmed with top and bottom line performance by RGR.

I am increasing my full year 2009 estimates for Ruger to $1.40 which translates to 8.3x eps with the 2.42/share in net cash back out. I am raising my 2010 estimates from $1 to 1.20. Therefore, Ruger is now trading at less than 9x trough 2010 earnings. Raising price target to $20/share.

Below are some some of the highlights from the company's release:

• Our firearms unit production grew 63% from the second quarter of 2008 and 18% from the first quarter of 2009.
• We had a successful launch of a new product platform, the SR-556, our new modern sporting rifle.
• Cash generated from operations during the second quarter of 2009 was $13.1 million. At the end of the second quarter of 2009, our cash, cash equivalents and short-term investments totaled $43.6 million. Our pre-LIFO working capital of $100.0 million, less the LIFO reserve of $43.2 million, resulted in working capital of $56.8 million and a current ratio of 3.0 to 1. The Company has no debt.
• During the first half of 2009, capital expenditures totaled $6.8 million. We expect to invest approximately $12 million for capital expenditures during 2009.
• Our backlog dropped to 412,300 units as orders received in the second quarter decreased by 59% from the first quarter of 2009. This decline in orders received reflects the following:
  • A reduction in the industry-wide surge in demand that began in the fourth quarter of 2008;
  • The large backlog at the end of the first quarter that discouraged further orders;
  • Prolonged ammunition shortage at retail that hindered retail firearms sales;
  • Stronger inventories throughout the distribution channel; and
  • Normal product seasonality.

Disclosure: the author is long RGR.

Comments

[User 26283:]

You are right on Target. These guys are doing great. The management team gets it. They know the sport. The demand for the new stuff is strong and this stock over-corrected.

Jul 31 10:09 AM

[Doc 224899:]

Ruger's new AR model uses gas piston operation as a standard feature. Most AR models available previously had gas piston operation only as an expensive option, or exclusively used a direct gas impingement system and didn't even offer gas piston operation as an option.

In other words, Ruger got it right by correcting the greatest single design flaw in the AR family: the direct gas impingement system that has made the mechanism unreliable and maintenance-intensive since its discouraging introduction during the Vietnam war(all veterans in their early 60's or late 50's remember this). In addition, it comes with standard features like rail mounts for optics and accessories on every available surface, and nifty detachable front and rear sights that flip up and down.

It's a product that doesn't even stay in wholesale inventories very long before every unit is shipped to dealers, and then immediately transferred to consumers standing in line for a chance to purchase every unit of the product, and they're generally willing to pay what dealers are asking without much dickering.

Now, if that was the case for Ford and GM and Chrysler, the recession would be a lot closer to resolution.

Oct 17 03:20 PM