With Gun Sales Slowing, Can Gun Companies Keep Up Growth?

| About: Sturm, Ruger (RGR)

On December 12th, 2012 a deadly mass shooting occurred in Newtown, Connecticut that was the latest in a sequence of mass shootings that have plagued the United States (which mass shootings said to have tripled since 2009). Whatever your political views on guns are however, one thing is for sure, gun sales have been surging since the mass shooting, due to President Obama's suggestion and implementation of new gun control measures that could threaten to heavily regulate and even ban some higher capacity "assault weapons". Gun owners, and even many people who had never bought guns before went out and bought guns at rates that hadn't been seen in decades.

As the above chart from Bill Moyers using FBI data shows, background checks for firearms nearly doubled from January of 2012 to January of 2013, in the month after the Newtown shooting and President Obama's proposed gun control measures. While demand tapered off in the next few months, demand for background checks (which provides a good metric for measuring the gun market, even though background checks don't represent the actual number of firearms sold) has continued to grow. Michael Fifer, CEO of firearms manufacturer Sturm, Ruger, and Co. told the Wall Street Journal "they should have had much more in inventory to take advantage of political opportunities."

Quite simply, stores were selling out of guns; from Wal-Mart (NYSE:WMT) to local hunting and outdoors stores, ammunition and firearm accessory prices soared, if they were able to be found in stores or online. Cabela's (NYSE:CAB), Sturm, Ruger, and Co. (NYSE:RGR) and other gun manufacturers and retailers are seeing profits soar as this surge in sales continues, but the question remains; how long can it last?

As we've seen many times in the past, reliance on a single product is generally not a good thing, and for retailers like Cabela's, which have quickly seen their share of merchandise sales coming from guns rise (from 40% in 2010 to 45.3% in 2012, and figures that are likely to be far higher after proposed gun control measures), it is particularly worrying, especially when the category is so susceptible to the political climate. Other gun focused retailers are also experiencing similar gun sales growth, even as other product sales stagnate.

Almost all of firearm sales growth can be attributed to the fear, whether warranted or not, that new gun control legislation will be passed, limiting gun ownership. Cabela's share price has risen sharply as new gun control measures are pushed, but with the drive for gun control having been blocked in the senate when they failed to reach the required 60 votes, it is unclear whether the conditions that have allowed for the firearms sales surge will continue.

The Senate has moved on to other issues, like more hopeful immigration reform and as is shown in the following chart from Google Trends, American interest in gun control (which rose predictably along with gun sales this January) has been slowing.

General interest on terms such as "buy AR15", "buy guns online" etc. follows an almost identical pattern indicating that general gun sales will continue to slow.

Despite the likely tapering off of gun sales as the fear of gun control passes, Cabela's continues to expand its businesses in other areas, especially online. Sturm and Ruger has a strong record of increasing sales and an extremely valuable brand in the U.S. and abroad (and ranked fifth on Forbes' list of the best small American companies). What the statistics do show is the high likelihood that the "gun sales rush" that has sent the stock of many a firearms manufacturer and retailer soaring should be expected to slow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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