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| About: Sturm, Ruger (RGR)

Sturm, Ruger & Company (NYSE:RGR)

Today’s focus is on Sturm, Ruger and Co, maker of guns.

The gun business is on a heck of a run. Ever since lawmakers called for additional regulations and some states banning certain firearms, people have been loading up on guns before they are banned from purchasing them.

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RGR Earnings Multiples

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These are Monster Business Returns

Read the article comparing ROE, ROIC and CROIC to catch up on the definition and the difference.

If CROIC is above 13%, it is consider really good, but for RGR to be at 80% at the moment is unheard of.

What makes these returns even more impressive is that the company has no debt.

Dan Myers wrote a mega post on the types of returns achieved by companies with no debt vs with debt. The results will surprise you so read it if you haven’t.

And that’s partly why I’m looking at these numbers and it is that much more impressive.

Regarding FCF and earnings, except for a few very minor drops, if you drew a line, it a straight one marching towards the upper right corner.

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RGR FCF, owner earnings and EPS Chart

This is the same throughout the financial statements.

Take a look at the margins.

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RGR Margins at all time high

What’s driving all these high margins and returns are strong business performances.

One of my favorite ways to look at the efficiency of a company is to analyze the cash conversion cycle.

It’s more than just looking at days in inventory. It gives you insight into the operations and health of the company.

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RGR Cash Conversion Cycle

  • RGR is collecting money at a faster rate than its 10 year average of 39.6 days
  • Inventory days is at the lowest its ever been. 10 year average is 66.1 days and 5 year average is 21.5 days
  • Days payable has gone up which means that it can utilize its cash for some extra days

All in all, this has led to a cash conversion cycle of 7.7 days.

To give you a sense of how awesome this is, Wal-Mart (NYSE:WMT), which strangles vendors by paying as late as possible, has a cash conversion cycle of 10.

That should put into perspective how well the guns have been selling and the business is operating.

So What’s It Worth?

The part I hate the most when coming up with an intrinsic value range is that I’m human and I don’t know what turn of events can occur.

I fully admit that I am no expert on guns. Growing up, I’ve only used my BB gun to shoot at pigeons wearing my homemade commando gear before I got in trouble by the neighbor.

But the only main risk that I can see is:

  • Political risk. If by a miracle, guns are banned in the US, then guess what happens to Sturm Ruger

This is a risk that you obviously have no control over.

The one other risk that you do have control over is determining what price you are willing to pay for the growth the company has been experiencing.

At the moment, it’s priced for about 12-13% growth.

With its solid fundamentals, although the stock price is hitting highs every week it seems, $70+ range is a fair price for a great company.

It’s a Charlie Munger type of company.

The upper range of the intrinsic value?

Assuming that it’s business as usual, I can see it hitting $100.

But what if it isn’t business as usual? What if Sturm, Ruger hits the wall?

Based on using the Earnings Power Value method, a no growth value is $35. If growth is wiped out, then with the current numbers, a 50% shave is possible.

Here’s the range again.

  • Upper: $100
  • Fair: $70
  • Lower: $35

There’s a possible 42% upside with a 50% downside. Fairly symmetrical risk-reward.

As much as I like the company, I will have to put it on my shopping list and wait for a sale.

I want to buy something where the upside is 50% and downside is 10%.

Something along those odds.

To see the numbers for yourself, click the button below to download the stock report, saved using the OSV Stock Analyzer.

Stock Report Download of Sturm, Ruger
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RGR Stock Report

Disclosure: No position