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Sturm Ruger, A Beaten Up Stock Up For Grabs

|Includes:AOBC, BA, HON, LMT, Sturm, Ruger & Company Inc. (RGR)

First, a little background. Ruger designs, manufactures and sells guns and other firearms, like pistols and rifles. They sell guns to people who are qualified to get these guns, to commercial distributors, or directly to law-enforcement agencies and foreign countries. This is a very simple business, just designing, manufacturing then selling guns.

It is a recognized brand name around USA. Ruger announced, in March that it would stop collecting customer orders until late May. The reason for doing that was because they could not supply enough for the demand from their customers out there! How many companies can achieve that? This may be also because it is a small 740M company, just starting to expand fast. But that is really a great feat for a small company like Ruger. More about its business, Ruger is classified into the industry, Aerospace/Defence Products And Services, which also means that these guns are sold to foreign countries' military or law enforcement firms. But, they also can be sold to people who do things like hunting. Ruger has a direct competitor, Smith and Wesson , but there are some concerns about its fundamentals, its EPS Growth rate for the past 5 years is at -8.5% compared to Ruger's 117.6%. Although its market cap is half of Ruger's 740M cap, their revenue is one-fifth of Ruger's 45M, being only around 9M. Smith's ROE is only 10% compared to Ruger's 35%, which also means that Ruger's management is more efficient than Smith's.

On the technical aspect, RGR has pulled back quite a lot from around $60 to the current price of around $37. I have liked the fundamentals of the company and have been monitoring it for some time. I find that this pullback gives investors a very good opportunity to buy shares of a fundamentally solid company at a price near intrinsic value. Its intrinsic value, according to calculations by me, is around the $36-$38 range. The current price is at its intrinsic value, which is quite acceptable to me. This pullback comes after a 800% run up from its low in 2008, at only around $7. Speaking about insider trading,the Director of RGR, Mr. John Consentino, bought half a million dollars worth of shares at around $39, at a price cheaper than the current price, when insiders from many other companies are selling. This reflects the cheap prices of the stock now. It is so cheap that the insiders think that it is bargain! Not every company with solid fundamentals pull back for one to buy often, so I think that now,even as the market is so messy, it is a strong buy for all seeking for opportunities to get into a trade.

Now, into Ruger's fundamentals.

Here is Ruger's EPS for the past five years.

2007 0.46

2008 0.43

2009 1.42

2010 1.46

2011 2.09

EPS has been growing very fast the past five years. Even when there was a recession, EPS did not decline much. Its EPS is at a 16.4% growth annually for the last 5 years. This is great. Although I will not expect EPS to grow at this rate, a growth rate slightly slower of around 7-10% is expected, which is quite impressive too.

  Its price was at $8.89 5 years ago and now it is at the $39 mark. For every dollar of EPS earned, $5 was generated in market price. This number is great.

More calculations:

2016 EPS will be $3.37 (10% annual growth) Assuming each dollar earned generated $4 in share price, stock price will increase to the $85-$95 range, not counting dividends.

Speaking about dividends, its dividend has also increased steadily. Last quarter it paid a dividend of $0.325, which is a neat 3.3%. It has increased steadily, from 21 cents a quarter ago and 14 cents the quarter before. I do not expect Ruger's dividend to increase so fast, at this pace, but at a slower but steady pace.

Here are Ruger's sales for the past five years.

2007 144M

2008 174M

2009 266M

2010 251M

2011 324M

Sales are also increasing steadily. Even through the 2008-2009 recession, sales were only affected slightly, when other companies were experiencing drastically decreasing sales and earnings.

In other fundamental aspects, Ruger has a pretax margin of 19.3% and an operating margin of 20.3%, not impressive, but fabulous compared to some leaders of the industry like Boeing and Lockheed Martin, both at around 8% and Honeywell, at around 6%. Its quarterly earnings has also beaten analysts' estimates by quite a big margin and Zacks' earnings consensus for 10 quarters consecutively. Furthermore, its short float is at 27.4%. Even in such a good company, there are so many bearish about its stock. But, to me, this is just a plus point . I believe that, soon those people will be forced to cover their shorts and it will only drive prices higher.

More fundamental indicators:

P/S 1.94 (Very Good)

P/C 7.42 (Very Good)

Quick Ratio 2.93 (Excellent)

Current Ratio 3.08 (Excellent)

Debt $0.00 (0%) (Excellent)

EPS Growth Past 5 Years 117.6% (Excellent)

Sales Growth Past 5 Years 14.4% (Very Good)

Quarterly Sales Growth 48.9% (Excellent)

Quarterly EPS Growth 89% (Excellent)

ROA 24.52% (Excellent)

ROE 35.36% (Excellent)

ROI 31.88% (Excellent)

Gross Margin 35.43% (Very Good)

Profit Margin 13% (OK)

I believe that RGR will continue its run up, both in share price and earnings. Therefore, I rate RGR as a strong buy.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RGR over the next 72 hours.