Sturm Ruger: Is It Time To Take Profits?

| About: Sturm, Ruger (RGR)
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In my first article on Sturm Ruger (NYSE:RGR) back on Aug. 8, I made the case that shares of the company were significantly undervalued and a very attractive buy, given the company's valuation, growth prospects and dividend yield (which was 5.5 percent at the time). The company traded at a P/E of just 10. The company was not covered by many analysts and had a history of smashing analysts' estimates each quarter, other positive signs.

I also made the case that Sturm Ruger presented a better investment than its main competitor, Smith and Wesson (SWHC), as the latter pays no dividend and ha $100 million debt, compared to Sturm Ruger which has zero debt and a pretty large dividend.

Here's what both stocks have done since that article was published: Shares of RGR are up 35 percent since that time, with Smith and Wesson down by a small margin.

Credit: Yahoo!Finance
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Why Are Shares of Sturm Ruger Soaring?

Sturm Ruger smashed analysts' estimates for Q3 2013 earnings, as I suspected they would. Here are some of the highlights:

- Solid Earnings: The company reported net sales of $170.9 million and fully diluted earnings of $1.44 per share. This is compared with net sales of $118.2 million and fully diluted earnings of 88¢ per share in the third quarter of 2012.

- For the nine months ended Sept. 28, 2013, sales were $506.4 million and fully diluted earnings were $4.25 per share. For the corresponding period in 2012, net sales were $350.1 million and fully diluted earnings were $2.58 per share.

- Earnings were driven by the 45% growth in sales and "our ongoing focus on continuous improvement in our operations," said Chief Executive Officer Michael O. Fifer.

- New products released by Sturm Ruger have been a big success. Fifer said that new product sales represented a staggering $146.6 million in sales, or 32 percent of total firearm sales in the first nine months of the year. (New product introductions in 2013 included the LC380 pistol, the SR45 pistol, and the Ruger American Rimfire rifle).

- Dividend Policy Remains Strong: The company declared a dividend of 58¢ per share for the third quarter, for shareholders of record as of Nov. 15, 2013, payable on Nov. 29, 2013. Note: This dividend varies every quarter because the Company pays a percent of earnings rather than a fixed amount per share. This dividend is approximately 40% of net income. This gives the company a forward yield of 3.7 percent.

- Balance Sheet Strength: The company remains debt-free. As of Sept. 28, Sturm Ruger has cash of $54 million.

Growth Should Continue in 2014 as New Facility Opens

The company announced on Sept. 3, 2013, that it had finalized its purchase of a 220,000 square foot facility in North Carolina.

This purchase is the company's first major expansion in over 25 years and production is expected to begin in early 2014.

The bottom line is that demand for Sturm Ruger's products are so strong that the company needs to open this facility to keep up with demand.

Is It Time to Take Profits?

If we look at analysts' estimates, you will notice that only 2 analysts cover the company. This is one of the things that stood out to me when first initiating a position back in August and something that I think still gives investors an edge.

Again, analysts are predicting full-year earnings in 2014 of just $3.98 a share! This is way too low and very pessimistic in my view.

Consider this: For 2013, Sturm Ruger has a positive earnings surprise estimate of 27.30% and beat analysts' estimates for Q3 2013 by 38 percent.

I believe more realistic EPS estimate for 2014 is somewhere in the range of $5.60 to $7. Full year EPS of $6 for 2014 would give Sturm Ruger a forward P/E of just 12, so it is not unreasonable to think that the company is still undervalued at $70 a share, even after the 30 percent run-up in share price. With the new facility opening, earnings could even be higher than this.

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Note: From a technical perspective, we are nearing overbought levels on the RSI.

*However, even so, I would recommend that investors sitting on big gains at least take some profits off the table.

I personally sold 10 percent of my position at a 30 percent gain. It's never a bad idea to lock in profits and I think this is a pretty good time to do so.

Does Smith and Wesson Look Attractive Here?

Meanwhile, even though I strongly prefer RGR in the long-term over Smith and Wesson, I actually think that Smith and Wesson could outperform going forward based on their valuation.

Smith and Wesson has a P/E of under 9 and analysts are expecting an average of $1.32 for full year 2014, so the company has a forward P/E of just 8.3! The stock is trading at just $11 a share, so they remain significantly undervalued in my view.


In the long-term, Sturm Ruger remains a strong buy, but investors sitting on 30 percent or greater gains should consider taking some profits off the table. Meanwhile, Sturm Ruger's competitor, Smith and Wesson, looks significantly undervalued at current prices and could be a better bet in the short-term.

Disclosure: I am long 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.