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Summary

  • Sturm, Ruger, while a controversial company, is a quality stock trading at a fair valuation that has proven brand-power and offers some nice current income.
  • Investors have given up on it and tossed it in the discount bin.
  • With zero long-term debt and plenty of cash, this 65-year old business is a perfect fit for your income portfolio.

The Situation

Firearms have been a sensitive topic lately, what with the push by many politicians and special interest groups to force the registration of guns. Some even want to make it illegal for the general public to own firearms for personal protection (or sport hunting).

Regardless of your political viewpoint on this topic, there are plenty of legitimate gun-buyers out there. Most of them are law enforcement and paramilitary operations. The fact remains that someone has to sell firearms to these folks. That someone is Sturm, Ruger & Co (NYSE:RGR).

When it comes to manufacturing firearms and accessories, RGR is one of the most well known brands in the marketplace. They have been in business since 1949 designing, manufacturing, and selling firearms in the United States. But this is not just an American tale about the 2nd Amendment and the right to bear arms. RGR is a story of an excellent company that is on solid financial footing.

This Southport, Connecticut based small-cap dividend payer should be a holding in every income investor's portfolio.

The Numbers

RGR might be a small-cap stock, carrying a market cap of just under $1 billion, but it is big on shareholder value. Right now, you can own RGR while it boasts a trailing twelve-month dividend yield of 4.50%, a massive return on equity of over 49% and a 15% net profit margin. All the while, sporting a price to earnings ratio of 9.65, a price to sales ratio of 1.45, a price to cash flow of 11.51 and an unbelievably low debt to equity ratio of only 0.37.

(Below based on trailing-twelve months of quarterly SEC filings)

Gross Profit Margin: 35.2%
Operating Margin: 23.4%
Net Profit Margin: 15.1%
Return on Equity: 49.2%
Dividend Yield (-ttm): 4.5%

Price-to-Earnings: 9.65
Price-to-Book: 4.75
Price-to-Sales: 1.45

Price-to-Cash Flow: 11.51
Current Ratio: 2.29
Debt-to-Current Assets: 0.51
Debt-to-Equity: 0.37
Enterprise Value/EBITDA: 4.99

The Facts

For such a small company, RGR offers investors big value and a nice return in the form of current income. Plus, it is a well-run business that has been around for 65 years.

RGR is one of the nation's leading manufacturers of firearms for the commercial sporting market. They are the only full-line manufacturer of American-made firearms and offer 400+ product variants across more than 30 product lines to consumers.

Distribution channels for its firearm products include independent wholesale distributors and exporting via networks of commercial distributors. It also sells directly to foreign customers (mostly law enforcement agencies and/or foreign governments).

Recent earnings were announced for the second quarter 2014. From that earnings release…

"For the six months ended June 28, 2014, net sales were $323.5 million and fully diluted earnings were $2.34 per share. For the corresponding period in 2013, net sales were $335.4 million and fully diluted earnings were $2.83 per share."

The Company also announced today that its Board of Directors declared a dividend of 45¢ per share for the second quarter, "for shareholders of record as of August 15, 2014, payable on August 29, 2014."

The Risks

The immediate reaction of the naysayers here will be that clearly RGR did not meet earnings expectations and sales fell, causing shrinkage in net margins. We certainly see that and this is why we share some items of concern with RGR management.

In general, due to political ramblings on gun control and the banning or forced registration of firearms in the U.S., guns in general have come under scrutiny once again and are looked upon generally as a "taboo consumer good."

This increase in media attention over the past year-and-a-half has actually been helpful news for the industry and for RGR's sales.

However, now that media hype has slowed, there's been a general reduction in overall industry demand. It is to be expected. These trends are not new and they tend to go through cycles.

Competitor product discounting and lack of significant new internal products coming to market are additional headwinds recently affecting RGR.

The other concerning factor is that shrinking margins might affect the dividend. However, the dividend is not a fixed amount per share, but rather it varies each quarter because it is paid out as a percent of earnings. The most recent dividend is approximately 40% of net income (or $0.45 per share).

The Silver Lining

In light of the aforementioned risk factors, there are three extremely important things to keep in mind about RGR:

1) RGR has zero long-term debt…yes ZERO;

2) RGR is a consistent cash cow with nearly $26.8 Million in free cash flow generated in the past year; and

3) RGR just announced that its BODs expanded its authorization to repurchase shares from $25 million all the way up to $100 million. Get ready for a boost to your stockholder yield (which currently stands at 7.2%).

The Conclusion

Whether you are for or against the personal ownership of firearms, the truth remains that police and other law enforcement agencies and sporting enthusiasts support RGR's endeavors.

The important facts to remember here are that RGR…

-Operates a great business;

-Is in very solid financial condition with a fortified balance sheet;

-Knows how to treat its shareholders well; and

-Has a solid brand name with nearly three-quarters of a century in business to back it up.

If you are looking for a quality stock at a fair valuation that has proven brand-power and offers some nice current income, then RGR belongs in your portfolio. It faces some market influences just like any other retailer would face. It just so happens that it sells firearms instead of food, clothes or widgets.

Don't discount RGR on its line of business or current market sentiment. Investors are betting on RGR to fail and they might have taken it a little too far as most of the weakness is already priced into the shares.

Investors may want to consider picking up a quality business with strong brand-power and a solid history of operations. Or, if you are worried about near-term price fluctuations, consider scaling into a position over the next six-eight months.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: How Guns Can Protect You In The Stock Market