Gun Control Myths Resurface But Stocks Bounce Back

Summary

• Three popular gun control myths disputed.
• The American interest in firearms is unlikely to subside.
• Gun stocks have bounced back during season of controversy.
• American Outdoor Brands Corporation has long-term prospects.

During school tragedies involving firearms, the public debate over gun control systematically resumes. In most cases, time is spent on rehashing already decided issues because myths resurface and sidetrack the discussion. These myths can also cause a DIY stock investor to make mistakes regarding firearm and outdoor recreation companies.

Three Gun Control Myths That Cause Investor Fear

1. Gun manufacturers are going to be held liable.
2. The demand for guns will taper with tougher restrictions.
3. Public sentiment supports gun control.

Gun manufacturers are not liable. It was in 2005 that U.S. Congress essentially decided guns were not at fault. The Protection of Lawful Commerce in Arms Act (PLCAA)¹ states that gun manufacturers are not liable for crimes committed with firearms. This has been challenged multiple times and is often forgotten or ignored. If the gun has a defect, then there is grounds for a case.

Smith & Wesson or its holding company, American Outdoor Brands Corporation (NASDAQ: AOBC) gives updates to lawsuits in its quarterly reports.

[W]e were a co-defendant in a case filed on August 27, 1999 by the city of Gary, Indiana against numerous firearm manufacturers, distributors, and dealers seeking to recover monetary damages, as well as injunctive relief, allegedly arising out of the misuse of firearms by third parties. On January 2, 2018, the court granted defendants' motion for judgment on the pleadings and dismissed the case in its entirety. On February 1, 2018, plaintiff filed a Notice of Appeal with the Indiana Court of Appeals. We believe that the various allegations as described above are unfounded, and, in addition, that any accident and any results from them were due to negligence or misuse of the firearm by the claimant or a third party. - Q3 '18 SEC Form 10-Q

The demand for guns increase when access is restricted. It's hard to tell what American loves more; if it's beer or guns. We know that the age restriction of 21 for consuming alcohol has not closed the college parties. It has not stopped a friend or family member from purchasing these items for minors either. For families specifically, alcohol in the home is rarely policed and some jurisdictions allow for alcohol to be shared by parents²:

In Texas, a person may provide alcohol to a minor if he/she is the minor's adult parent, guardian, or spouse, and is visibly present when the minor possesses or consumes the alcoholic beverage. - Texas Alcoholic Beverage Commission

There have been similar age restrictions for handguns. For minors under 21, the possession of a handgun can be unlawful. However, handguns are in the homes and many states still have private person sales without formal checks.

Walmart (NYSE: WMT) and Dicks Sporting Goods (NYSE: DKS) now voluntarily restrict semi-auto rifles (AR-15s and what some call assault rifles). They've stopped selling them altogether or are limiting sales to adults 21 and over. Yet, this action is not a large concern for American Outdoor Brands Corporation.

...we looked at what percentage of our sales overall for the Company, were as a result of MSR sales to Dick's and it's extremely small, it's actually one-tenth of one percentage points of our total sales. - CEO James Debney at Q3 '18 Call

Meanwhile, a parent in disagreement can still buy the rifle and gift it to a teenager at home with none the wiser. More notable for the gun market is the countless stores in competition, including Sportsman's Warehouse (NASDAQ: SPWH) that will continue to sell to all legal ages.

Public sentiment is diverse regarding gun control. It is easy to be in a bubble of like-minded constituents. Coming from major news outlets that cater to Democratic political stances, the popular view might be perceived as anti-gun. However, in reality it's much more diverse than that. After Florida's recent school shooting, the Florida Senate rejected new gun control. One might blame this result on Republican values, but even Democrats such as Bernie Sanders can't be pigeonholed. Sanders voted to pass the 2005 PLCAA that protected gun manufacturers from liability. Several Democratic majority states still labor to protect conventional Second Amendment rights.

Gun violence in schools has had immediate shock and demand for gun control, however the opposite effect tends to happen. States tend to increase the presence of guns.

Since 2013, in response to the massacre at Sandy Hook Elementary School in Newtown, Conn., legislation in state capitals across the country has sought to arm school staff. At least 10 states allow staff members to possess or have access to a firearm on school grounds... - New York Times³

Gun Stocks Have Bounced Back

While there had been some downward trend in firearm sales, the latest gun control debate was attempting to crash gun stocks. The sentiment was overstated or oversold and the market witnessed a bounce back in price per share.

AOBC Price data by YCharts

SPWH Price data by YCharts

Both companies had their attempted bear attack in the same time frame. The swing was more dramatic in after hour activity for AOBC. On March 1, 2018 AOBC had an After Hour price as low as $7.11 per share. By March 5th, the stock price had an inter-day high of $10.57 for a 49% bounce.

AOBC Long-term Horizon Outweighs Short-term Cuts

American Outdoor Brands Corporation has started to launch its new handgun product, a polymer .380 caliber with modern, user friendly features and extra safety measures. The series is appropriately labeled, "EZ." This model is scheduled to expand into other calibers. The company continues to speak on its new distribution center that is in the making. The center is scheduled to be running in December of 2018, which will be the company's fiscal year 2019.

After April 2018, AOBC will start its 2019 fiscal year and they will benefit greatly from tax changes "...tax rate for Q4 of approximately 40%. Due to the various give and takes under the tax reform act, we won't see a benefit on our new tax rate until fiscal '19. For those of you modeling in our'19 numbers, we currently estimate the tax rate in that fiscal year will be around 27% to 29%." - (see Seeking Alpha's AOBC transcript).

For the immediate short-term results, the financials and sentiment may appear risky. The company is seeing Y/Y decline in total revenue. A $157m Q3 is not the exciting performance of 2017 when sales were elevated at $234m. The earnings per share/EPS this time was a low $0.09 Non-GAAP or $0.21 GAAP, when last year these EPS were both over half a dollar. Profit margin has reduced to sub 6% and the P/E of approx. 9.8 might seem too high for a company predicting flat sales.

In sizing all the circumstances, the short-term under performance and current negative sentiment is causing the price per share to return to bargain lows. The American Outdoor Brands Corporation stock is rated a buy.

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1. 15 U.S.C. §§ 7901-7903.

2. Texas Reg. & Penal Code, Title 4 § 106.06.

3. Erica Green & Manny Fernandez, Trump Wants to Arm Teachers. These Schools Already Do, New York Times, https://www.nytimes.com/2018/03/01/us/armed-teachers-guns-schools.html (accessed March 5, 2018).

Analyst’s Disclosure: I am/we are long AOBC. 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.

Comments

[Smicro-cap Scavenger]

Lots of great discussion here. I want to thank @navyair for the latest detailed entry. If you know of someone that would like to chat more on this issue, invite them to this with sending them a link.

Five of my other articles that are still free to read can be found here at Author's Picks: http://bit.ly/2Gf16Ta

[kevinconway]

Bernie is Sen from the great hunting state of VT....what do you think is position is going to be?

Motivation to kill is not natural. Actually it is but has been suppressed. Human's closest relatives are chimps and males will kill young in order to get a female, among other things. But when it comes to shooting that is a different story.

Even trained people will freeze in a tense situation thrust upon them...80%. When split second reaction is required any hesitation can be fatal. That is why it is absolutely insane to arm teachers. Best to use combat hardened and swat team level people for protection.

Years ago in my home town on LI an ATF agent was picking up meds for his dad in the local pharm when a robbery took place. He drew his gun and chased the perp out of the store where a scuffle took place. At the same moment two ex cops, one a LT, came out of the restaurant next door...the ATF agent, John, was killed first and then the perp. by these highly trained cops.

A teacher is in a class when a shooter is in a school...do what? Draw her gun and protect her students, go out and confront the shooter? Insanity.

The US has both a gun problem (access) and a social problem ( over the top instances of murder by guns), BOTH must be addressed. And the shrill NRA is not helping things one bit.

[Teufelhund1775]

I agree the US has a mental health problem, but instead of a gun problem, I would say we have a culture problem. There are many social economic issues that lead to violent crimes. It isn't that simple to say guns or anything else is to blame, after all it isn't the guns that do the killing.

[navyair]

T-1775, et al,

Take a look at this great column by Walter Williams on that very point:

http://bit.ly/2GdLXli

[Teufelhund1775]

Agreed. Unfortunately today, common sense is not a common virtue. There are major societal changes that have taken place, most dramatically I would say in the last sixty years or so beginning at the end of the 1950's with the counter culture and sexual revolution. The American family dynamic has changed where previously two parents were the norm, and now divorce , broken homes, and single parenting is the new norm. Single parenting and birth out of wedlock are leading causes of poverty. This is a culture problem, not a gun problem. If guns do all the killing, why do we have to send soldiers to war, when we could just ship a bunch of guns overseas?

[Orphan Brigade]

Gary, Indiana. Now there is a prime example socialism in its finest form...

[Smicro-cap Scavenger]

@Orphan - It's also a good example on civil gun law. The limitations are being better defined.

[W]e were a co-defendant in a case filed on August 27, 1999 by the city of Gary, Indiana against numerous firearm manufacturers, distributors, and dealers seeking to recover monetary damages, as well as injunctive relief, allegedly arising out of the misuse of firearms by third parties. On January 2, 2018, the court granted defendants' motion for judgment on the pleadings and dismissed the case in its entirety. On February 1, 2018, plaintiff filed a Notice of Appeal with the Indiana Court of Appeals. We believe that the various allegations as described above are unfounded, and, in addition, that any accident and any results from them were due to negligence or misuse of the firearm by the claimant or a third party. - Q3 '18 SEC Form 10-Q

[Orphan Brigade]

Limitations in what regard ? Curious..

[RickJensen]

Limitations of liability for manufacturers.
I believe he is making the case that manufacturers are not being held responsible for whatever anyone does with a gun.

[Teufelhund1775]

The myth that someday police, federal law enforcement, or military will knock on your door to take your guns is completely unrealistic. What will happen is that ammo will be taxed at an extreme rate to make it too expensive for most people to buy, new laws will limit the types of weapons you can buy and what you can modify. The intent is to simply "breed out interest" hoping that it becomes too expensive or simply too much work to own so father/mother does not pass the tradition in to children and eventually nobody cares about the second amendment. Death by a thousand cuts.

[navyair]

In fact, a Congressman from Illinois has proposed just that. He has a bill pending (9 other Dem sponsors) to raise ammo taxes up to 50% and guns at 20% increases.

http://bit.ly/2tA8XrR

It always amazes me that the average person cannot see that the people who control the police, or who have money to hire private security aren't going to be affected...it is Mr. and Mrs. Taxpayer who lose under such proposals.

[Teufelhund1775]

1. Americans don't know their own rights.

2. Americans are more concerned with celebrities and sports than politics.

3. Celebrities and sports exist to distract people from important issues that will affect them, much like the coliseum in Rome did. Not much has changed.

[Teufelhund1775]

The same people shouting for gun control and "assault weapon" bans are the same people making millions in violent films and video games, who live in gated communities protected by people with, that's right, guns. How are those gun free cities murder rates doing these days? Any new "gun control" legislation is only going to impact those who intend to obey the law. This is a liberal agenda and has been for decades. Anyone who has studied history knows the second amendment was written for the people to resist a government that no longer represents it's citizens. Liberals know this and hate it. It's difficult to determine a difference between modern liberals in America today and socialist/marxists. They know they cannot change the minds of grown adults, so they go after your children in kids programs on television, movies, commercials. It's well known that our education system is primarily controlled by liberals from teachers and professors who also select which books are purchased for your children to read and learn from in school, effectively paint brushing history.

[kevinconway]

Anyone who has studied history knows the second amendment was written

1. for the people to resist a government that no longer represents it's citizens.

2. .........................

[Teufelhund1775]

no second reason... self defense, hunting, home protection. All those things are great. but ultimately the second amendment exists to protect American citizens from a tyrannical government. And the founding fathers got that right. Nazi's and communists both have one thing in common... they took guns away from their citizens.... then killed about 100 million people give it take, in the last century.

[AustralopithicE]

Correct.

[kenodick]

The criminal will always find a weapon to use. One big area that should get more attention is the video- gaming-movie industry that make taking life so easy and routine. But that would get right at the "liberals".

[riddix]

Leave my video games alone!

[Teufelhund1775]

Just like millions of gun owners obey the law peacefully every day, so do millions of people who play video games and watch violent movies. The problem is that there is a culture shift that has taken place over the last few decades, where everyone wants to blame movies or video games... what about the parents? Violence in movies is nothing new by the way. Broken families, divorce, and single parenting is however. This is a cultural issue that cannot be solved by new laws against guns, movies, or video games. America needs to find its soul again and make the youth a priority and protect the family unit instead of incentivising divorce through inequality in the family court system.

[achilleus]

Why do companies advertise on tv? They know it’s effective or they wouldn’t do it. Yet hour after hour of increasingly violent shows.... has no effect?
I couldn’t possibly agree with such an idea.

[Merg&Aq]

Sorry, but I read this article and LOL'd

[RickJensen]

I also watched the stocks (RGR,VSTO and AOBC).
Since I collect, I expected some movement as in the past with shootings. I was surprised to see how quick the recover was, less than a week and back to normal (except for VSTO).

I don't know what the future will be, usually we have a sustained bounce up and gentle trailing back down. I don't invest in them because they are all over the place. I have noticed that prices on lowers didn't make any real change, so that tells me no panic buying. You can still get a lower (stripped) with adjustable stock for 150.

So I think we just dropped and then popped right back. It was nothing like what happened to them when Trump got elected. That was a short dream.

[Maks F. S.]

Spot on, you can still buy AR's for under $500 and Lower Receivers for $40.

[RickJensen]

Yes, but would you trust a $40 lower?
My quote was a PSA. Was your's from Skippys Bait shop? (:->

[Merg&Aq]

He's talking about bare, stripped lower receivers without any parts. Just the receiver....

[navyair]

Incidental evidence: I've heard several callers to talk shows say that they never considered purchasing a modern sport rifle until the latest screed by politicians eager to push the anti-gun agenda. Then they ran out and purchased them. Several callers were between 18 and 21.

I'd guess that sales will be up for a month or two which should take up some of the excess in the supply chain.

Interesting to note, the wacko in Florida did not use large capacity magazines despite the call to ban them. He used 10 round magazines because they fit better in what he carried the gun in. Several were reported to be broken and very low quality.

Just goes to prove that a determined criminal with nefarious intent will always get around rules meant for law abiding citizens.

I think gun stocks will continue to be cyclical, reflecting the general unease of an overvalued market. Once there is a correction, then buy on the fundamentals.

Thanks for the article!

[Maks F. S.]

Spot on.

Same with with raising the minimum age to 21... wasn't the shooter over that age? And the same thing for all of the mass shootings, except the case of Sandy Hook where he stole the gun.

Gun control would absolutely do nothing.

Here is the issue... we had over 2 weeks of documented data for February since the shooting and there was still no meaningful pop.

Heck, the CEO of American Outdoors even mentioned it on the conference call.

Yes, people are getting interested and go to gun stores to look and complain, but generally, not to buy.

We had the worst mass shooting in history in Las Vegas... gun sales did NOTHING!

In the immediate aftermath of Sandy Hook, Long Gun sales doubled their records... this month, they barely broke 2017 levels.

In time this will also get swept under the rug.

Then you look at New Jersey... where we have real new gun control coming and sales declined again.

https://seekingalpha.c...

But... in general the whole premise of this article I don't quite get...

No one is saying that gun sales would decrease because of gun control...

Gun sales are decreasing because of a lack of new gun control....

and saying prices bounced back... um... $9 to $10 is not bounced back when it was $30 not too long ago.

The stocks fell nearly vertically and needed anything to get some capitulation... it will happen and then continue heading where they were going to.

Lastly, and of course... what is missing is AOBC's own guidance for Q4 AFTER the shooting occured.

Short of new imminent gun control, it is wishful thinking.

And of course no one is discussing the serious risk of liberal majority shareholders who can essentially shut the companies down at any moment.

[billrla]

Hi, Maks: Your last sentence is important. Lefty activism could lead to concerted efforts to force divestment of gun & ammo manufacturers by public pensions, private fund managers and university endowments. Now that students have been indoctrinated and organized to push for more gun control, the social and political landscape is getting more perilous. It's not a sky-is-falling scenario, but, it is a concern. As a case study, look at how hard the coal industry was pushed during the Obama years. Shuttered mines. Thousands of lost jobs. Bankruptcies.

[Maks F. S.]

Thanks and spot on.

The truth is... there does not need to be ANY gun control for the industry to be impacted. They are already the largest shareholders of the publicly traded companies.

Furthermore, at these low valuations, it will only take a few billion to put a serious dent into 3 large industry players who command dominant market share.

[Chilled]

I will agree with all.