Sturm, Ruger & Co: Strong Cash Flow + Peak SI Ratio (Squeeze) + Low Valuation = Strong Long

Sturm Ruger (RGR)
$12:50/share
Base case Price target: $19.50 or 15x 2010 trough earnings ($1 ex cash). The Best case could be far more dear.

Tremendous execution: Sturm Ruger continues to execute: new, higher gross margin products, improved manufacturing and sourcing and sharper marketing. While the peak of the gun buying "surge" is over, RGR continues to outgrow the healthy market by dominating the concealed carry personal defense segment and entering the lucrative AR segment. While backlog will fade back to historical levels over the next year, RGR will continue to generate high returns on capital and high cash flow on the solid core (ex surge) sales growth.

Short Squeeze looks obvious: Curiously, short sellers continue to pile into this potential short squeeze disaster with the "melt up" risk rising with each additional share sold short. Currenty, nearly 27 days of current volume are sold short meaning the ability to cover and exit without price impact is impossible. So the "surge" has ended yet RGR continues to put up some of the strongest numbers in its history. Ruger screens as the highest short interest of any company with NET CASH and a sub 10x P/E. A very dangerous short indeed.

Strong Earnings: My expectations for Q3 are 70mm in top line with a 22% operating margin yielding 15mm in operating income. For Q4 I estimate nearly the same margins and top line as Ruger is running at full capacity. Tax effected, the company should earn $.50/share or better. Adding Q3 and Q4 together, Ruger will generate $1 of earnings in the back half of the year which yields $1.76 for the year.

Super Cheap Valuation: Backing out the year end $3 in cash (or more) from the current 12.50/share price = 9.50/1.76 = 5.4x 2009 earnings. My minimum expectation for 2010 is $1 (and could be far higher with extensions into new product categories such as military, police, and a renewed effort in shotguns). Backing out the $4 in cash from ending 2010, the shares trade at just 8.5x post surge trough earnings. And this all for a company that generates 20% returns on capital that has been successfully turned around over the past 3 years. Additionally, the company has the ability to re-purchase even more of the remaining 19.1mm shares outstanding. Over the past 3 years, the company has bought back nearly 30% of the shares outstanding.

Earnings Kicker: In addition to a super undervalued stock and overshorted equity, there is a chance that Ruger uses its cash horde to do an acquisition of another manufacturing turnaround target that could take future earnings potential well above even the most optimistic forecasts.

Political kicker: While the shorts are focused on the end of the surge - which has already occurred without drama and a steady sales level - there is a good chance that the remaining hand gun bans in place in the country are repealed as most Supreme Court watchers expect. While the shorts are focused on the negative political implications, the regulatory winds are actually far better than is understood.

Buy Ruger. Price target $19-20.

Comments

[fireball:]

anti-2nd ammendment politicians make for stromg gun and ammunition sales. civilian disarmarming seems to lead to mass execution at least when the numbers are examined through history. government is a dangerous servant and a fearsome master. sometimes it is wise not to trust politicians. better politicians fear the population than the population fear politicians.
the mini-14 is a copy of the m-14. this is a more durable weapon than the ar-15/m-16, in my opinion. there are also replacement parts issues with the ar-15 and its gas operating system.
imo the ar-15 may have slightly better accuracy.

Oct 18 09:36 AM

[Gus McRae:]

The short sellers of this overshorted stock will feel like the Germans in the Paris Movie theater at the end of Inglorious Bastards when the squeeze begins: Lots of hot flames and no way out.

Oct 19 03:56 PM

[Gus McRae:]

FBI NICS data comes in better than expected with y/y firearms sales +12.4%. This is yet another pushout of the short seller thesis that firearms sales have plummented. They have not. Just as last months +12.3% also is an annoying fact getting in the way of the overhyped short sale thesis against this fine American manufacturing company.

Oct 21 09:55 AM

[Abridge:]

At what price do the cover? and when. NYSE website most trade are index Arb from pro trac data for the past few weeks.
small guy not buying yet or selling

Sturm Ruger & Co $ 10.85
RGR 0.11

Short Interest (Shares Short) 4,932,200
Days To Cover (Short Interest Ratio) 31.3
Short Percent of Float 26.25 %
Short Interest - Prior 5,121,600
Short % Increase / Decrease -3.70 %

Nov 04 07:54 PM

[Abridge:]

Ruger recently received the Firearms Manufacturer of the Year award from the National Association of Sporting Goods Wholesalers for the third consecutive year.

The award was presented during the association's 36th annual meeting in Reno, Nev. NASGW wholesaler members evaluated the performance of top manufacturers on four key criteria — distribution policy; marketing, sales and promotion; logistics and operations; and NASGW and industry support. “Winning the Manufacturer of the Year award for the third year in a row is a great honor for Ruger,” said Ruger CEO Mike Fifer. “Our organization is dedicated to meeting the needs of our independent distribution network. Through a strong commitment to our Voice of the Customer program, we are generating a product mix that is meeting the demands of the current marketplace, helping both Ruger and the wholesalers remain successful in this competitive business environment. We want to thank NASGW members for this award and their continued support.”

Nov 09 11:25 AM