Sturm, Ruger Looks Better Than Gold

| About: Sturm, Ruger (RGR)
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Scared investors have been flocking to gold as our economy, political system, and financial system continue in turmoil. It seems that every other commercial these days on TV or radio is a gold commercial. Gold is not the only investment that is currently seeing panic-like buying, however. Sturm, Ruger (NYSE:RGR) has been hitting new highs for the last several years. This guns and ammunition stock has outperformed gold by a wide margin, and it currently is not as crowded and as highly publicized as the gold trade.

Consider the following facts. Sturm, Ruger has outperformed Gold over the last 1 month, 3 months, 6 months, 12 months, 3 years, and 5 years! Here is a screenshot that shows the performance of the stock vs. the S&P 500 over these same time periods:

It is also important to note that Sturm, Ruger was even up in 2008, when the market was down 38.5%.

Now let's compare the performance of gun and ammunition stock Sturm, Ruger with gold:

RGR * Gold

1 month 28.1% * 20.7%

3 months 40.3% * 23.8%

6 months 125.7% * 36.7%

12 months 64.2% * 52.7%

3 yr. avg. 90.2% * 27.5%

5 yr. avg. 34.9% * 22.8%

As you can see, Sturm, Ruger has outperformed gold by a wide margin, and why not? Earnings at RGR have been growing at an average pace of 90% per year over the last five years. No wonder the stock is delivering such astonishing returns.

Ruger is a small-cap company that was established in 1949 and is headquartered in Southport, Connecticut. It is the fourth largest firearms manufacturer in the United States.

I look at hundreds of stock charts on a daily basis. I find that looking at the parts gives me a more complete understanding of the whole. Ruger is one of the very best looking charts in the market at the current time, especially when you consider all of the charts that are breaking down right now.

Here is a one year chart of the stock:

Here is a three year chart of the stock:

Now let's look at the valuation numbers for the stock:

Earnings Est Current Qtr.
Sep 11
Next Qtr.
Dec 11
Current Year
Dec 11
Next Year
Dec 12
Avg. Estimate 0.41 0.35 1.73 1.93
No. of Analysts 4.00 4.00 4.00 4.00
Low Estimate 0.38 0.33 1.70 1.85
High Estimate 0.43 0.37 1.76 2.05
Year Ago EPS 0.31 0.29 1.46 1.73

There are only four analysts that currently cover the company. The consensus estimate for next year is $1.93.

Growth Est RGR Industry Sector S&P 500
Current Qtr. 32.30% 610.60% 90.50% 26.00%
Next Qtr. 20.70% 237.70% 78.90% 32.80%
This Year 18.50% 36.30% 38.10% 15.90%
Next Year 11.60% 25.90% 27.60% 15.50%
Past 5 Years (per annum) 57.91% N/A N/A N/A
Next 5 Years (per annum) N/A 13.76% 15.30% 10.76%
Price/Earnings (avg. for comparison categories) 16.26 14.38 28.11 11.60
PEG Ratio (avg. for comparison categories) N/A 1.17 2.46 1.70

The analysts do not currently have a five year growth estimate for the earnings of Ruger. We are going to have to use a reasonable number in order to project earnings out into the future.

First, consider that the company has been growing its earnings by 90% per year over the last five years. Second, consider that the industry that Ruger is in is expected to grow its earnings by about 13%-15% per year over the next five years. Last, consider that Ruger is expected to grow its earnings by 18% this year and 12% next near.

I feel pretty comfortable using an average 10% growth rate per year for the company over the next five years. If we extrapolate current earnings estimates ($1.93) at that rate, Ruger would be earning about $2.83 per share, five years from now.

Now, what kind of a multiple will a stock like Ruger deserve at that point in time?
Consider that the stock is currently trading with a PE ratio of 18. It has a forward PE of 15.28. Here is the stock's average PE history over the last four years:

Avg P/E Price/ Sales Price/ Book Net Profit Margin (%)
12/10 9.70 1.16 2.52 11.1
12/09 7.70 0.69 1.94 10.1
12/08 16.80 0.66 1.73 4.8
12/07 28.90 1.20 2.24 6

Four year average: 15.77

The stock's average PE ratio over the last five years is 15.77, while the current PE ratio is just over 18. Given the spectacular growth of earnings and the environment that we are in now, I feel pretty comfortable using a multiple of 18 on future earnings, the same PE ratio that the stock is trading at today. We would also see multiple expansion if the situation in the market and in the world worsen.

Also consider that the stock pays a 2.0% dividend that has to be factored in over the next five years. Using $2.93 in earnings and a 2.0% annual dividend, I come up with a five year target price of $50.86. This gives the stock 82.4% upside potential over the next five years.

Here is another screenshot that shows the summary of the valuation:

Remember that I am substituting a 10% five year growth rate as there is not one currently supplied by the analysts that follow the stock. The stock currently gets a value grade of "B." A stock has to have 100% or more upside potential over the next five years in order to get an "A" value grade.

All in all, I don't think that the "fear trade" is going away any time soon. I think that the performance of the stock speaks for itself for momentum investors. I also think that the current valuation is not even close to being over-blown currently. In addition to all of this, the chart looks great. I also like the fact that the stock was up during the last bear market.

What is there not to like? Ruger currently earns a grade of A- in my proprietary grading system. The value grade of "B" prevents it from being a pure "A." I focus only on stocks that are grade A- or better. This represents about 8% of the overall market at the current time. In this environment (and I don't see it changing any time soon), I really like the stock. I currently have Ruger ranked 151 out of 2,737 stocks.

Disclosure: I am long RGR.