Mention of Gun Control Drives Sturm, Ruger & Co.'s Sales Upward

| About: Sturm, Ruger (RGR)

Talk of gun control, one might assume, is not good for companies that sell guns. But here’s what really happens to gun sales when the debate over gun laws heats up:

That’s a chart for Sturm, Ruger & Co. Inc. (NYSE:RGR), which derives 98% of its revenues from sales of firearms. The big spike in sales started just as it was becoming clear that Barack Obama – a gun control fanatic, according to the industry lobby groups — would actually take office. That revelation led a whole a lot of people to line up for gun permits.

Even enacted gun control has done nothing to dampen gun sales at Sturm Ruger. The company’s revenues rose in the year after Congress passed a five-day waiting period for gun buyers in 1994, and again after the criminal background check went into effect in 1998. Its products were exempted from assault weapons bans because it sold those only to law enforcement.

Gun control is again hot news, as politicians try to suss out politically correct responses to the January 8 shooting in Tucson that killed six and wounded 14 others. New York City Mayor Governor Michael Bloomberg, apparently upset that such a rampage with a legal weapon had not yet set off serious gun control efforts at the federal level, tried to heat up the debate on Monday with the shocking news that he was able to buy a bunch of guns illegally at a gun show in Arizona.

None of this has had any lasting effect on the share price of Sturm Ruger, the only pure handgun play on the market. YCharts Pro finds the stock undervalued.

With or without national news, these shares are undervalued. But the reasons have more to do with the company’s fiscally conservative strategies and focus on operating efficiencies than the repercussions of one crazy gunman.

Chief Executive Michael Fifer has focused on making Sturm Ruger’s manufacturing operations more efficient ever since he took the job almost five years ago. The reward has been drastically improved profit margins. In the first nine months of 2010, profit margins averaged some 13 percent higher than for the same period in 2009.

Likewise, return on equity has been consistently strong in the past few years.

Backing up these operating improvements is an extremely strong balance sheet. The company has almost $53 million in cash on hand and no debt, which helps compensate for somewhat weaker free cash flow. This unencumbered status gives management considerable confidence that it could raise substantial cash if needed. That’s optimism rarely heard these days from a company with $271 million in annual revenue.

Most other U.S. gun makers are private companies or divisions of more diversified businesses, so it’s difficult to calculate a fair price to sales ratio for Sturm Ruger. But its shares are trading well off its peak price to sales ratio.

If share prices stay stable but sales do spike upward — perhaps on the threat of stricter gun laws, or, for example, if the new handgun the company launched late third quarter is popular — the line on that P.S. chart will drop further. The more it drops, the more attractive the shares.

Then there’s the gift of the dividend. We use the term “gift” here because no one should buy this stock solely for its dividends. The company calculates it using a vaguely described formula of operating results combined with internal forward forecasts, which makes it unpredictable and gives it wonky dividend yields. Although shareholders could not really count on the payouts, they have collected a nice 6 cent to 12 cent dividend per share in each quarter of the past five years.

There is a chance that the Arizona tragedy, which included the death of a child and the serious injury to a Congresswoman among its horrors, was just the kind of atrocity Congress needed to get serious about limiting gun ownership. That would certainly hurt Sturm Ruger shares. It would also be a feat that even last year’s more liberal legislature didn’t come close to accomplishing.

So far, gun control has been pretty good for this gun business.

Disclosure: none