Breaking News: Firearm Background Checks Top 2 Million In March

Includes: AOBC, RGR
by: Mark Gomes

According to data released today, demand for firearms re-accelerated in March and remains at an elevated rate. Pipeline Data believes that firearm background checks exceeded expectations in March, exhibiting exceptional seasonal strength.

The firm estimates that over 2.2 million checks were performed through the FBI's National Instant Criminal Background Check System (NICS). This represents the fourth straight month over 2 million and the fourth highest total ever.

The annual growth rate ticked up to 86%, the third highest growth rate on record -- a surprise reversal of the deceleration exhibited in February.

NICS Background Checks
Month Checks Y/Y Change
Jan-12 920,840 17.3%
Feb-12 1,266,344 31.4%
Mar-12 1,189,152 20.0%
Apr-12 931,658 10.5%
May-12 840,412 20.6%
Jun-12 846,437 24.5%
Jul-12 853,355 25.4%
Aug-12 1,042,924 27.8%
Sep-12 1,007,259 14.7%
Oct-12 1,118,994 18.4%
Nov-12 1,525,170 38.5%
Dec-12 2,783,765 97.3%
Jan-13 2,495,400 171.0%
Feb-13 2,309,393 82.4%
Mar-13 2,208,000 85.7%

This latest set of data is welcome news for the firearm industry. After January's record-breaking growth rate of 171%, the February tally plummeted to 82%, leading many analysts to conclude that the recent spike in demand was reaching its end. The March data indicates otherwise for a market that is already beset with supply shortages and a backlog that extends well into the immediate future.

Last month, Smith & Wesson (SWHC) announced January-quarter earnings that topped Wall Street estimates by 13%. On its conference call with investors, CEO P. James Debney reported a doubling of its order backlog:

"Based on the strong demand for our high value product portfolio of firearms, order backlog more than doubled during the quarter. As of January 31, we had more than a year of sales reflected in backlog. And lastly, as part of our primary objective to create value for stockholders, during the quarter we purchased $20 million worth of our common stock."

Similarly, Sturm Ruger & Co (NYSE:RGR) exceeded expectations by 24%. Its year-end bookings were more than double 2011 levels, giving the company a total backlog of 1.5 million units at December 31, 2012. The company indicated that its efforts to rebuild safety stock continue to be outstripped by increased demand. On its earnings call, CEO Michael Fifer commented:

"Despite the increased shipments, our distributors' inventories also decreased by 76,000 units in 2012. This is a compelling indication of the strong retail demand for our products."

Since the release of Pipeline Data's February estimates, shares of SWHC and RGR have each retreated nearly 20%. Pipeline's March report implies that investors may have been premature in their actions. Pipeline Data now estimates that the current supply shortage will persist throughout 2013 and extend into next year, which could spark a reversal in the shares of both companies.

Disclosure: I am long SWHC, RGR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.