January NICS: Starting 2018 With More Declines

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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 January, 2018.

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

A look in the underlying firearms sectors, comparing historical handgun vs long gun sales.

A discussion regarding the need to look at the total sales rather than just likely transaction volumes.

This morning investors received two alerts regarding their firearms holdings, both delivering more bad news.

In the first alert investors learned that Barclays recently put out a research note calling for continued weakness in hunting product sales and sporting oods overall.

The second punch came in the latest FBI data release showing continued weakness in background checks.

So let's take a look at the all important January 2018 NICS data. 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 2,030,530 NICS checks for the month of January. This number is down 12,654 checks or less than 1% from a year ago.

January 2018's numbers are down 515,272 from 2 years ago, or a drop of 20.24%.

Source: FBI NICS

Just like with the December data, even though the numbers are down, they are not that bad.

Source: FBI Data, Compiled by Author

Of course as we know, these headline numbers, as mediocre as they are, are still highly overstating the true health of the firearms market. As we discussed this in, "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.

Over the years, these administrative checks have been making up a continuously growing percentage of the headline data.

If the overall number is down, AND headline numbers include a growing number of administrative checks, how bad are the likely numbers?

Adjusted NICS Data

Looking at the more detailed reports we can filter out those administrative checks and try to figure out the actual checks that were tied to a firearms transaction. This is what we refer to as "adjusted NICS" numbers.

Source: FBI/NICS

The adjusted number for January 2018 is 890,938. This is down 85,363 checks or 8.7% from last year's 976,301.

As bad as this drop is, it is seriously concerning when we compare it to the 1,302,140 checks for January 2016, a difference of 411,202 or 31.5%!

The biggest drop year over year is in handgun checks, further cementing that it is a drop in new shooters who will more often than no, start their firearms purchases with handguns.

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

Once again, showing a multi year, year over year decline.

Source: FBI Data, Compiled by Author

Let's break this down further.

One person I recently spoke with asked me whether handgun sales are as volatile as long guns. After all, gun owners rush out to buy AR-15s and other scary looking guns before pistols, right?

Source: FBI Data, Compiled by Author

Looking at the above one thing is crystal clear, with the exception of 2013 where we saw the massive spike, long gun sales have been quite steady over the last 19 years with a year over year loss since 2012.

What are the volatile sales? Handguns.

Source: FBI Data, Compiled by Author

In both of the charts, the pattern is quite clear. Sales for both handguns and rifles were steady through 2008. After President Obama was elected, sales grew and increased all time highs. Over the past few years, sales have turned around.

There had to be bright spots though, right?

Let's take a look at New Jersey

New Jersey recently elected a liberal Democrat for whom limiting gun rights and access to firearms is at the top of the agenda.

This HAD TO drive new gun sales, right?

One firearms dealer I spoke with at Shot Show 2018 mentioned that he had not seen any noteable differences in new sales.

Another dealer I recently visited this weekend however mentioned that their sales increased a bit since November. Was it elections? Or as I found out shortly after, a local competitor closed down.

Even with the elections and looming gun control, likely sales have failed to increase year over year.

Source: FBI Data, Compiled by Author

Handguns have shown the largest year over year drop,

Source: FBI Data, Compiled by Author

... while long guns did show some traction with a small uptick year over year.

Source: FBI Data, Compiled by Author

Why haven't New Jersey gun owners run out and stocked up?

Because I believe, they largely have in the fears of Hillary Clinton winning the presidential elections. Simply put, the demand has been pulled forward.

Beyond The NICS

In my last article I spoke in detail and I believe it demands to be said again, beyond the BAD NICS data, investors need to keep in mind, all of these sales are at FAR LOWER prices!

While in 2016 gun owners were demanding guns and paying top dollars, most of 2017 and 2018 has been characterized as a slower year, at significantly lower prices.

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!"

Source: December NICS: Wrapping Up A Concerning Year

Bottom Line

More bad news for American Outdoor Brands (AOBC), Vista Outdoor (VSTO) and Ruger (RGR) investors. Equally concerning for sporting goods retailers like Dicks (DKS), Sportsman's Warehouse (SPWH), and Big 5 Sporting Goods (BGFV).

The good news is, a number of analysts are finally starting to acknowledge the big picture, even though the majority of the ones I spoke with, still believe a rebound is coming this summer. Personally, I disagree.

While there are plenty of opportunities for small and mid sized companies to steal marketshare away from competitors and what will undoubtedly be a great opportunity to pick up failing peers in the near future, the macro trends and return to normal will be a major headwind for the largest players.

For more of our NICS looks, please take a look at "December NICS: Wrapping Up A Concerning Year" and "November NICS: The Best Black Friday, But Does It Matter?"

For a broader discussion of the firearms market, please take a look at my running series from Shot Show 2018.

As always, thank you for reading and your discussion.

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.