December NICS: Wrapping Up A Concerning Year

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Includes: AOBC, RGR, VSTO
by: Maks F. S.

Summary

A deep dive into the most recently released NICS data by the FBI for the month of December, 2017.

A look into the more realistic "adjusted NICS" data and how it relates to American Outdoor Brands Company, Ruger and Vista Outdoor.

A formula gun stock investors need to follow as part of their due diligence process.

On Wednesday, I was caught by surprise by a Seeking Alpha news alert:

Source: Firearm background checks down 8% in Dec.

The surprise was not necessarily the message, which should not have been a surprise to any of my readers, but rather that the FBI was able to release the data just 3 days after the end of the year! And that even included a holiday!

So let's take a look at the all important December 2017 NICS data and sum up 2017. Further, we will see how it relates to American Outdoor Brands Company (AOBC), Ruger (RGR) and Vista Outdoor (VSTO) investors.

Headline Data

The FBI recently reported 2,586,138 NICS checks for the month of December. This number is down 185,021 checks or 6.7% from a year ago.

For the complete 2017, the FBI reported 25,235,215 NICS checks, down 2.3 million checks or 8.3% versus 2016.

Source: FBI/NICS

Looking on the surface, yes, without a doubt, even though background checks are down more than 8% compared with last year, this is still the second highest number of checks over the last 20 years.

Source: FBI Data, Compiled by Author

The concern as expressed by investors is that this was the sharpest drop yet recorded and may signal a reversal.

While NICS data is not directly reflective of actual sales, seemingly the majority of investors and the media focus on this publicly released data as a proxy for the health of the firearms market.

As we know, these headline numbers, as bad as they are, are still highly overstating the true health of the firearms market. As we discussed this in my previous article, "NICS Data: Objects In The Mirror Appear Way Bigger Than They Are," we know that the headline number includes a large amount of administrative or background checks that are NOT related to the sale of a firearm and instead are typically tied to the routine check performed by the states on concealed carry license holders.

Adjusted NICS Data

If we look at the more detailed reports, also freely published by the FBI, we can filter out and look at the actual checks that were tied to a firearms transaction. This is what the industry refers to as "adjusted NICS."

Source: FBI/NICS

The adjusted number for December is 1,533,768. This is down 241,924 checks or 13.6% from last year's 1,775,692.

To be a bit more conservative, as our astute reader vkncaa pointed out in a previous comment, December 2016 showed abnormally high numbers for California due to then impeding gun control legislation that was implemented in January 2017.

Where MOST of those changes showed up was in the "*Other" category which includes "AR-15 Lower Receivers," - which are essentially insurance policies. By buying a lower receiver, which is the only registered part on an AR-15 firearm, you can then buy the rest of the parts at a future date and complete the firearm.

If we compare December 2017 vs December 2016 Adjusted NICS Less "*Other" we have 1,505,507 for December 2017. This is STILL down 158,475 checks or 9.5% from last year's 1,663,982.

How does the Adjusted Data for December compare with the big picture?

Near Decade Lows!

Source: FBI Data, Compiled by Author

Of course the same holds true for the past few months.

2017 In Perspective

As we looked at the headline NICS data we saw 2017 as the second highest year.

If we look at the "adjusted" data, we can clearly see a plateau and December, 2017 ended up being only the 4th highest year and very close to being the 5th highest.

Year Handgun Long Gun Other Multiple Total
1999 2,536,738 5,217,451 0 148,115 7,902,304
2000 2,191,879 4,779,978 0 95,777 7,067,634
2001 2,167,213 4,943,375 0 97,132 7,207,720
2002 1,845,112 4,409,311 0 93,069 6,347,492
2003 1,851,078 4,383,057 0 99,236 6,333,371
2004 1,990,460 4,506,847 0 101,985 6,599,292
2005 2,241,740 4,584,462 0 109,750 6,935,952
2006 2,441,325 4,789,591 0 130,117 7,361,033
2007 2,635,629 4,570,697 0 324,401 7,530,727
2008 3,331,199 4,907,967 0 187,079 8,426,245
2009 3,689,604 4,978,641 23,208 235,685 8,927,138
2010 3,678,001 4,842,184 52,761 180,609 8,753,555
2011 4,301,389 5,445,966 70,137 219,618 10,037,110
2012 5,682,963 6,866,225 162,823 230,270 12,942,281
2013 6,387,502 7,128,798 212,776 241,360 13,970,436
2014 6,199,243 5,543,371 268,263 225,475 12,236,352
2015 7,333,808 5,479,441 329,499 242,375 13,385,123
2016 8,085,498 5,988,511 586,137 257,723 14,917,869
2017 7,226,979 5,234,757 399,993 236,167 13,097,896

Source: FBI Data, Compiled by Author

Source: FBI Data, Compiled by Author

Is it therefore any surprise that Ruger's (RGR) and American Outdoor Brands' (AOBC) revenues closely mimic the ebbs and flows seen in the "adjusted NICS" data? I think not!

Chart RGR Revenue (NYSE:TTM) data by YCharts

Looking at the quarterly earnings we can clearly see the peaks and valleys seen in the NICS data show up in both Ruger's and AOB's revenue numbers.

Yes, American Outdoor Brands did grow in 2016 however there is a simple reason for that. It was NOT guns... it was growth through acquisitions.

Beyond The NICS

Perhaps the most important part of the firearms discussion though has to be centered around "price." More specifically the average selling prices for the firearms.

Without a doubt NICS data is an important data point to consider as part of a firearms investors due diligence process, however you cannot strictly look at adjusted NICS as a representation of the health.

One MAJOR mistake that I believe new long investors made in 2017 was seeing 2017 headline numbers come in and stating, "Hey, the numbers are still good, the companies must be doing great!"

NICS of course is only data points of transactions. The more important part that they missed is the price.

When I look at firearms data, I look at it from the following perspective.

Adjusted NICS * Average STREET Selling Price = Expected Revenue

VERY FEW readers and commenters ever bring up selling prices. Even the media completely ignores price and focuses on "headline NICS" data. More disappointing is the number of bullish firearms writers who completely dismissed the many calls and comments coming in stating...

"Yes, NICS data is down, BUT... WE HAVE NOT SEEN PRICES THIS LOW IN OVER 10 YEARS!"

So, even though NICS data is down a whopping 12% 2017 vs 2016, average sales prices in my estimates are down 20% or more on many firearms and certainly ammunition as I have outlined in my Vista Outdoor articles.

Bottom Line

Bottom line: anyone who is still holding AOBC, RGR or VSTO long certainly needs to complete the entire equation as we highlighted above. It is NOT just about the demand, as represented by adjusted NICS data; it is also about the selling prices.

The ONLY way to get a good read on that would be to look at the online specials being run and the day to day promotions, and to actually talk to gun store owners.

On the manufacturer side, we are still where we were one year ago when Donald Trump became president-elect. AOBC, Ruger and Vista Outdoor are sitting at record high inventories and producing more for the 2018 shooting season and shows. What's different is that demand has fallen off of the cliff, EVEN WITH a year full of mail in rebates and promos being shoved down customer's throats in order to get them to buy just one more gun.

Chart AOBC Inventories (Quarterly) data by YCharts

All of these results even came with the largest gun massacre in our history, the Las Vegas Shooting and two other acts of domestic terrorism.

My questions for long shareholders are the following...

What happens now that demand is further slowing to decade lows and customers are expecting further discounts and rebates?

What happens now to the companies who invested millions into expanding capacity in 2016 on the bet that Hillary Clinton would be president?

It ain't pretty, and warning signs have been CRYSTAL CLEAR for more than 12 months to anyone who has ever bought a gun.

If you haven't already, please take a look at my previous NICS Updates:

As always, thank you for reading and your comments! Please follow and subscribe to my content if you have not done so already. If you have, THANK YOU!

Disclosure: I/we 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.