As Gun Sales Spike In Anticipation Of New Federal Regulation, What Companies Are Benefiting?

Includes: AOBC, CAB, OA, OLN, RGR
by: Insider Monkey

by Anil Nain

Although unlikely to get through the Senate, a Federal Ban on weapons cleared a Democratic-run committee a few days ago. On a 10-8 vote, the Senate Judiciary Committee approved a renewed assault weapon ban. Most believe this marks the beginning of the hard work facing the bill's chief sponsor, Senator Dianne Feinstein, who has called passing a tougher ban a "life's mission." The law, which Feinstein authored in 1994, expired in 2004.

The bill would ban the "sale, transfer, manufacturing and importation of … all semiautomatic rifles and handguns that have a fixed magazine with the capacity to accept more than 10 rounds" and "157 specifically-named firearms."

Sales of guns appear to be spiking, stoked by consumer concerns of new regulations that would limit their ability to buy certain types of firearms. As such, a number of companies-- both directly involved in the manufacture and sales of firearms and also more broadly in the ammunition and outdoor markets-- appear to be benefiting. Here's a look at the present state of a few of these names.

A few weeks ago, Sturm, Ruger and Company (NYSE:RGR) reported net sales of $492 million, compared to $329 million in 2011. Fourth quarter sales were $141.8 million compared to $93.2 million year over year, and the company also announced the declaration of a 40.4-cent per common share dividend for Q4. In 2012, the company returned $111.5 million to shareholders in the form of dividends, which are typically about 40% of net income. Hedge funds have been bullish on the stock's income-centric appeal, as aggregate interest in Sturm Ruger (learn how tracking hedge funds has helped investors beat the market) increased by 7% last quarter.

Smith & Wesson (SWHC), meanwhile, reported recently that it earned $17.5 million in its most recent quarter ending January 31, up from $5.4 million in the corresponding quarter last year. Sales were $136.2 million, up 39%. Sales for the full year 2013 are expected to be in the range of $575-$580 million.

Earlier this year, Olin Corporation (NYSE:OLN) announced net income of $34.6 million for Q4, compared to $18.7 million in Q4 2011. Sales were $587.6 million, compared to $445.8 in the same quarter in 2011. The company's CEO, Joseph Rupp, was confident of its outlook mentioning, "As Olin enters 2013, we are optimistic that we can generate adjusted EBITDA in the range of $410 million to $440 million." In 2012, the company generated $373 million in adjusted EBITDA, the highest in company history.

Alliant Techsystems (ATK) placed No. 491 on the Fortune 500-- the company's third straight year of making the list. Alliant's full-year sales for 2012 were $4.6 billion; the company distributed $77 million to shareholders via dividends and repurchases, and retired $320 million of debt in 2012. Noted hedge fund managers David Dreman and Cliff Asness are two of the top name investors in this ammunition manufacturer, and seven of the funds we track established new positions last quarter (see all of the hedge funds who were bullish). Cabela's (NYSE:CAB) also recently reported a strong finish for 2012. For Q4, net income was up 19.7% to $89 million over $75 million in the same quarter a year ago. For the fiscal year, net income was $195.3 million, a 29.5% increase over the $150.8 million in 2011.

It remains difficult to predict the impact any legislation will have on the industry. Public opinion remains mixed: 50% view controlling gun ownership as a priority, while 46% say protection of gun ownership rights are more important, according to a recent Pew Survey.

To cite another survey Pew conducted in mid-February this year, "By 54% to 43%, more agree that stricter gun laws would reduce the number of deaths caused by mass shootings […] However, by comparable margins, the public also says that stricter gun laws would make it more difficult for people to protect their homes and families (by 58% to 39%) and give too much power to the government (57% to 40%)."

Clearly, the sentiment in this area of the economy remains mixed, but like most investment strategies (here's one with market-beating potential, for example), it's always important to remain up-to-date on the information surrounding the top names in any given industry.

Disclosure: I am long OLN.

Business relationship disclosure: This article is written by Insider Monkey's writer, Anil Nain, and edited by Jake Mann. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.