Sturm, Ruger: The Predictive Value Of Share Repurchases

| About: Sturm, Ruger (RGR)


Sturm, Ruger & Co increased its buyback program to $100 million.

The board will only execute the program if the stock price is cheap enough.

The amount of repurchases could become an indicator for the company's future results.

No execution of the program indicates more bad news in the next quarters.

Last month, I named Sturm, Ruger & Co (NYSE:RGR) as my number 1 share buyback candidate. I argued that the company has a great opportunity to start repurchasing shares, because it has a strong balance sheet and the valuation was not too high (see this article). This week, along with their second quarter results, Sturm, Ruger & Co announced an extension of its buyback program from $25 million to $100 million (see this press release).

The extension reflects my prior findings and I fully support the extension. Now, it is interesting to see how the board is going to execute the program, because the board was very clear about the terms for executing the program. According to the 2nd quarter earnings call transcript, Sturm, Ruger & Co will only execute the program if the price is right for existing and future shareholders (see this transcript). CEO Fifer stated:

Shareholders interest in purchasing stock should not have to compete with the company to acquire more shares. But if the stock price drops below the average of historical earnings multiple then it is appropriate for the company to step in and opportunistically repurchase shares. The key is to create value for current and future shareholders too and not just for the existing shareholders. Those are the highlights of the second quarter.

As I mentioned above, Sturm, Ruger & Co announced disappointing results for its second quarter. A strong decline in units sold from distributors to retailers, setbacks with the introduction of new products and significantly lower gross margins contributed to a steed decline the company's earnings per share. During the second quarter of this year, Sturm, Ruger & Co earned only $1.12 per fully diluted share compared to $1.63 a year ago. As a result, the company's shares dropped more than 15% this week.

As a shareholder, I wonder whether the board considers this week's decline as good opportunity to start purchasing shares. The board announced to only repurchase shares when "the stock price drops below the average of historical earnings multiple". According to the forward PE ratio over the past five years (see graph below), the stock price is currently trading below the historical earnings multiple. Therefore, I believe the Sturm, Ruger & Co should start repurchasing own shares soon.

RGR PE Ratio (Forward) Chart

RGR PE Ratio (Forward) data by YCharts

Even considering the weak second quarter results, Sturm, Ruger & Co. should be able to earn at least $4.50 a share (source: Yahoo Finance). This equals a forward PE ratio below 11, lower than the average forward PE ratio in the past five years. If the board decides not to start repurchasing own shares, investors could interpret this as a signal for weaker results in the next quarters. Therefore, the amount of share repurchases have a somewhat predictive value for investors and it is interesting to see whether the board is going to start repurchasing own shares in the near future.

Disclosure: The author is long RGR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here