Sturm, Ruger & Co. Print a Perfect Q2

| About: Sturm, Ruger (RGR)
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Sturm, Ruger & Company (NYSE:RGR) printed a perfect Q2 as revenues (+93% y/y), margins (19.3%, +400bps q/q), cash flow, and a dividend increase all well exceeded even optimistic expectations. Operating margins of 19% were extraordinary as management has strived to reach 15% for 3 years.

Interestingly, backlog did not decline much and is still at effectively record levels due to Ruger's strong new product sell through and demand. Declining demand was a key piece of the weak short sale story that has been overwhelmed with top and bottom line performance by RGR.

I am increasing my full year 2009 estimates for Ruger to $1.40 which translates to 8.3x eps with the 2.42/share in net cash back out. I am raising my 2010 estimates from $1 to 1.20. Therefore, Ruger is now trading at less than 9x trough 2010 earnings. Raising price target to $20/share.

Below are some some of the highlights from the company's release:

  • Our firearms unit production grew 63% from the second quarter of 2008 and 18% from the first quarter of 2009.
  • We had a successful launch of a new product platform, the SR-556, our new modern sporting rifle.
  • Cash generated from operations during the second quarter of 2009 was $13.1 million. At the end of the second quarter of 2009, our cash, cash equivalents and short-term investments totaled $43.6 million. Our pre-LIFO working capital of $100.0 million, less the LIFO reserve of $43.2 million, resulted in working capital of $56.8 million and a current ratio of 3.0 to 1. The Company has no debt.
  • During the first half of 2009, capital expenditures totaled $6.8 million. We expect to invest approximately $12 million for capital expenditures during 2009.
  • Our backlog dropped to 412,300 units as orders received in the second quarter decreased by 59% from the first quarter of 2009. This decline in orders received reflects the following:
    • A reduction in the industry-wide surge in demand that began in the fourth quarter of 2008;
    • The large backlog at the end of the first quarter that discouraged further orders;
    • Prolonged ammunition shortage at retail that hindered retail firearms sales;
    • Stronger inventories throughout the distribution channel; and
    • Normal product seasonality.

Disclosure: the author is long RGR.