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Summary

  • From our list of stocks with high return on equity, we are taking a closer look at Sturm, Ruger & Company, Inc. (RGR), which designs, manufactures, and sells firearms.
  • Its products include rifles, shotguns, pistols, and revolvers, and are sold under the "Ruger" name.
  • We required the companies had sales growth of over 20% in the prior 12 months. The 24 equities that made the cut are listed below including AMX, BYI, CHRW.

By Robert M. Greene, CFA

This week we ran a screen to identify companies that delivered returns on shareholders' equity (a well-regarded measure of company performance) of over 30% in the past year. Then we required the companies had sales growth of over 20% in the prior 12 months. The 24 equities that made the cut are listed below. This group may be a good starting point for investors seeking shares with promising year-ahead performance prospects that also boast a record of consistent corporate performance, at least in terms of profitability.

From the list we are taking a closer look at Sturm, Ruger & Company, Inc. (RGR), which designs, manufactures, and sells firearms. Its products include rifles, shotguns, pistols, and revolvers, and are sold under the "Ruger" name. The company also sells accessories and replacement parts for its firearms and investment castings to outside customers. Based in Connecticut, where it was founded in 1949, Sturm, Ruger operates almost exclusively in the United States, though it does generate about 3% of its sales from exports.

The company's 2014 results certainly haven't been setting the world on fire. Most recently, June-quarter sales and earnings declined 14% and 31%, respectively, from the prior-year period. The weakness caused RGR stock to drop about 10% in price, though we think the retreat may present a buying opportunity for intrepid investors. The lackluster performance doesn't appear to be an indication of poor execution, so much as a reflection of the dynamics of the gun market, which created an extremely difficult comparison with the prior year's unusually strong results. Some customers likely accelerated their purchases last year in response to anti-gun political sentiment, and related concerns among gun owners about increasing regulatory restrictions. This helped drive a 40% surge in Sturm, Ruger's 2013 sales, while annual earnings jumped 55%.

Though unwelcome, 2014's step back on the top and bottom lines (likely about 9% and 21%, respectively, for the full year) figures to be a temporary detour. Quarterly revenues probably won't deteriorate much further from June-period levels, and market conditions ought to stabilize in time for a modest revenue and earnings rebound in 2015. Too, research & development should support the creation of new products, which has been a significant revenue driver, particularly during 2012 and 2013.

Meanwhile, taking a look at the balance sheet, we see that Sturm, Ruger seems to take a different approach to capital than most of the other companies that generate consistently high returns on equity. Most of the names on our list make use of financial leverage to boost shareholder returns, while Sturm, Ruger carries no debt on its books. Too, the gun maker hasn't been very active buying back stock, which is another tool popular with those seeking to keep too much equity from building up on to the balance sheet. (RGR's board recently moved to increase the repurchase authorization to $100 million, though, as of the June quarter, no shares had been repurchased in more than two years.)

The company, though, does return a healthy chuck of its income each year to shareholders through a dividend. Still, even in this regard, Sturm, Ruger takes a different approach than most. Specifically, it isn't averse to lowering its dividend. Rather, distributions to shareholders rise and fall with the ebb and flow of earnings, as the gun manufacturer aims to payout about 40% of its net income each year. This year's payout, in fact, will likely decline about 15%. Even so, based on the most recent quarterly dividend of $0.45 a share, the stock provides a generous yield of about 3.5%, compared to the recent Value Line median of 2.0%.

Overall, Sturm, Ruger shares have a number of appealing attributes, but probably aren't for all tastes. The likely fluctuations in the dividend make them ill-suited for those requiring more predictable levels of income. Conservative investors, too, should note the stock has shown a propensity for wide price swings. This year, for instance, it has tumbled roughly 40% in price since hitting an all-time high in January. Still, more aggressive investors may well view the sell-off as an opportune time to establish a position in a company that has a strong track record for generating healthy returns on equity.

Company Name

Ticker Symbol

Market Cap $ (MIL)

Sales Growth 1-Year

Return on Shareholders Equity

America Movil

(NYSE:AMX)

91274.6

26.86

30.29

Bally Technologies

(NYSE:BYI)

2998.7

22.8

118.68

C.H. Robinson

(NASDAQ:CHRW)

10136.9

22

44.25

Cirrus Logic

(NASDAQ:CRUS)

1497.4

93.01

40.4

Five Below Inc.

(NASDAQ:FIVE)

2133.8

27.33

31.56

Fortress Investment

(NYSE:FIG)

1529.4

24.46

58.61

Fossil Group

(NASDAQ:FOSL)

5319.3

24.35

35.38

Generac Holdings

(NYSE:GNRC)

3207.1

25.74

55.04

Herbalife Ltd.

(NYSE:HLF)

4578.1

25.29

95.66

Las Vegas Sands

(NYSE:LVS)

55887.4

23.26

30.08

Michael Kors Hldgs.

(NYSE:KORS)

16699.9

49.64

36.62

Nektar Therapeutics

(NASDAQ:NKTR)

1695.4

81.58

180.2

Novo Nordisk ADR

(NYSE:NVO)

123288.2

22.55

52.74

Nu Skin Enterprises

(NYSE:NUS)

2860.6

44.92

42.49

Polaris Inds.

(NYSE:PII)

9815.5

22.91

71.14

Priceline Group (The)

(NASDAQ:PCLN)

66339.2

23.5

31.79

Ryland Group

(NYSE:RYL)

1749.3

63.61

41.74

Smith & Wesson Hldg.

(NASDAQ:SWHC)

711.9

24.41

53.12

Sturm Ruger & Co.

(NYSE:RGR)

981.5

39.33

62.13

Synutra Int'l

(NASDAQ:SYUT)

334.1

39.42

50.37

Take-Two Interactive

(NASDAQ:TTWO)

1779.5

104.05

45.11

Tempur Sealy Int'l

(NYSE:TPX)

3522.2

73.18

66.27

TiVo Inc.

(NASDAQ:TIVO)

1580.3

24.78

49.5

Valeant Pharm. Int'l

(NYSE:VRX)

37957.9

48.43

39.03

Source: Sturm, Ruger: An Aggressive Pick With High ROE