Shot Show 2019: Missed Trends Of 2018

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

Brief overview of the firearms industry and recent issues.

A discussion of two recent trends that American Outdoor Brands and Ruger have largely missed.

A look at how these opportunities can be implemented and their financial impacts.

It is now two weeks until the start of the largest firearms and outdoors trade show, the NSSF Shot Show 2019.

Just as I was last year, I am excited to attend, both as a gun guy there to take a look at the newest "toys" and as a financial professional to get a sense of the gun industry, specifically the health of the gun business.

For anyone who has read my previous firearms research, today's state of the industry is no surprise. Wrong bet, too much leverage, too much inventory.

There was one question, however, that continues keep my attention.

Is there anything that the firearms industry can do product innovation wise that would either grow the overall pie, or at the very least allow companies to steal market share from others?

If you asked me last year, my answer would be a resounding "No." After all, we already had the "pocket pistol" phase and nearly every gun owner, their family and friend has an AR-15.

On the other hand, the bump-fire stock frenzy was largely media created and largely due to President Trump and the ATF has run its course. (ATF reclassified bump stocks into creating machine guns.) As we know, unlike the concealed carry pistol and AR-15 rifle phases, very few gun owners actually purchased a bump stock device.

In 2018, once again thanks to the United States government, there were two major trends that really took hold. Unfortunately, I don't believe the largest firearms manufacturers noticed or even bothered to come up to bat!

Missed Trend #1 - "Personal Defense Weapon"

One firearm that is near the top of the list for most gun owners living in "Free America" is an AR-15 SBR, or a short barrel rifle.

By federal law, every rifle designed to be fired from the shoulder must have a minimum barrel length of 16" and an overall length of 26" or more. Rifles below these measurements are considered to be Short Barrel Rifles.

The advantage of an SBR is the ability to have the accuracy and stopping power of a rifle caliber round in a much smaller package, making it more effective for home defense such as while maneuvering with the gun.

While many less free, more restrictive states like New Jersey prohibit such firearms, in the majority of the country a civilian can purchase or build such a rifle with a federal filing and a $200 tax stamp. That firearm then becomes registered as an SBR. This is the same process used to purchase suppressors.

Source: Author shooting a select fire, short barrel rifle at Shot Show media day.

The problem with SBRs of course is that it can quickly become cost-prohibitive to own. After all, it is a $200 tax stamp just to own a shorter rifle.

The other way of owning a "short barrel rifle" is as a pistol that happens to be built off of an AR-15 lower receiver, firing the same rifle round.

Source: Bushmaster Carbon 15 Pistol

These were essentially an AR-15 rifle with a much shorter barrel with no shoulder stock. These guns were meant to be fired one handed and there was no real way to fire it from your shoulder or cheek.

The problem, however, is that these guns then became REALLY heavy pistols that were very hard to shoot one handed. In essence these were a civilian novelty item that in the grand scheme of things I considered frivolous purchases and were not, in my book, one of the 14 firearms that you NEEDED to have.

And THEN came the Pistol Brace

In 2012 a USMC and Army vet Alex Brosco was shooting with a disabled combat veteran and saw him struggling to control the firearm. Wanting to help his wounded friend and other vets, he developed the prototype for the pistol stabilizing brace, a device that would attach to the pistol and would strap around the shooter's arm, spreading the weight and stabilizing the firearm.

When submitted to the ATF for approval, the agency issued an approval letter stating the the device, when attached to a pistol, would not convert that weapon to an SBR, or a firearm designed to be fired from the shoulder. This meant the firearm was classified as a pistol and not an SBR requiring a $200 tax stamp.

Source: SB Tactica

Over the next few years the ATF came out with further clarifying letters, and the "AR Pistols" have proliferated into a very valuable PDW, or Personal Defense Weapon.

Up until recently, pistol braces where generally sold as accessories with the exception of a few pistols such as the Sig pistol PDWs.

Today, major companies such as Springfield Armory, Bushmaster, Sig and Palmetto State Armory produce rifle based PDWs. Notably missing from the list, however, are Smith & Wesson (AOBC) and Ruger (RGR), both of which produce very good quality AR-15 rifles for the less discerning gun buyers. The closest that they come are the M&P 15-22 Pistol and the Ruger Charger Pistol, both rimfire calibers.

Source: Springfield Armory's The Saint AR Pistol

Why is this important?

As we know, over the last few years, firearms prices, particularly on mass-produced AR-15 type sporting rifles have been plummeting in price. What were once $800 AR-15 rifles selling for $2,000 in the aftermath of the Sandy Hook school shooting are now selling for under $500, not leaving a lot of room for margins.

An AR-15 pistol, however, exempt from the $200 SBR tax stamp, commands premium prices. Most of all, it would cost roughly the same amount to produce as a traditional AR-15 rifle, with some potential savings in the shorter length barrels offsetting the higher price for the AR-15 pistol stabilizing braces.

Most of all, at least for the time being, creates a new category of firearms that I believe gun owners "NEED" to have. An AR-15 Pistol with a brace is like 90% of owning an SBR - minus the $200 tax.

Missed Trend #2 - American AK-47

Common to every gun community and online message board is the debate between the American made AR-15 and the Soviet/Russian made AK-47. Astute gun owners and investors however know that it is not about one or the other, but rather about how many of each!

While the AR-15 type rifle is known for its accuracy and pleasant shooting characteristics and is often considered to be the adult version of Lego, an AK-47 style rifle is the prime example of the gun you own when you need to know it will go "bang."

AK-47 style guns are known to be robust, reliable and durable. They were designed to be simple to operate and train on and they fire a 7.62 caliber bullet that has plenty of stopping power. For those reasons and more, they are the most commonly found rifles in war zones throughout the world.

When you think of a gun to carry for the end of the world, the AK-47 is it!

Source: AK47 Rifle carried by protagonist in the TV Show Falling Skies

For the last 30 years or so, an AK-47 style rifle was generally far cheaper to buy than an AR-15. The reason was simple, there were millions of AK-47 style rifles created in the Soviet Union and China that were now sitting in overstock warehouses and despite ongoing imports of Soviet firearms into the United States, there were always more.

While a good quality AR-15 rifle was typically $800 to $1,500, a good quality AK-47 was almost always under $800, with many good quality Romanian versions sold for around $450!

Despite the AK-47 pattern being largely ignored and unenforceable, as there were so many Soviet guns still left in warehouses, it was nearly impossible for American manufacturers to produce a competitive quality rifle for anywhere under $1,000. Those that did, used Soviet AK-47 receivers as a basis for their guns.

In 2014, the American gun companies were rewarded and American gun owners were punished by the Obama administration when they imposed sanctions on Kalashikov Concern, the group of companies producing and importing Russian made AK-47 style rifles into the United States such as the Saigas. Very quickly Russian made guns such as the Saiga 7.62x39 increased from around $350 to the current $900.

Molot, the maker of the highly rated and perhaps the best Russian made AK-47 style rifle, the Vepr was not targeted. While prices went up, you could still get the finest Russian made AK-47 for around $900.

In 2017 however, under President Trump and the U.S. Treasury Department, Molot was added to the sanctions, shutting the door to Russian made AK-47 style rifles. Today these rifles start at around $1,500, three times the price of a decent quality AR-15! More modern or customized AK pattern guns from Arsenal and Krebs Customs will cost around $2,000!

This of course leaves the area open for American made AK-47 style guns!

There were some of course who tried, such as the Century Arm's C39 and VSKA rifles. Unfortunately, they leave MUCH to be desired both in terms of quality and reliability!

Thus, I believe there is an opportunity to produce a good-quality AK style rifle in the United States in the $750 to $1,250 range by a well-known manufacturer.

Would I buy a theoretical Smith & Wesson M&P-47 or a Ruger Russian rifle? ABSOLUTELY! And while that notion may make some Americans cringe, we have to keep in mind that many American-branded guns are merely rebranded Eastern European firearms, such as the Springfield XD made in Croatia.

Trends Or Fads?

So the next logical question is: "Are these a new trend? Or are these merely fads that will not exist in the next few months?"

Personally, I do believe these are trends and longer-term opportunities. The pistol brace has opened up another way of using an AR-15 style rifle and I highly doubt Democrats or Republicans will be eager to remove the import restrictions on Russian-made firearms.

Realistically, though, I don't think it matters one way or another.

Here is the problem for the large publicly traded firearms companies.

Both Ruger and American Outdoor Brands, the maker of Smith & Wesson firearms, are now trying to find their base for revenues. For Ruger it is levels not seen since 2013. American Outdoor Brands is doing better, but we have to keep in mind that AOBC is no longer just firearms and has gone ahead and purchased revenue in the form of acquisitions!

Chart RGR Revenue (TTM)) data by YCharts

With the sales drop-off, the profit margins have also declined.

Chart RGR Profit Margin (TTM) data by YCharts

Both companies can help themselves to higher margins today by bringing out AR-15 Pistols, or any PDWs utilizing a pistol brace.

As we discussed, the major changes are shorter barrels and a different buffer/brace setup, which would have incremental costs. The benefit is that, instead of doing firesale pricing to dealers and distributors such as Buy 5 Get 1 Free...

Source: Davidson's

and having your AR-15's selling for under $500 in the retail market...

Source: GrabAGun

...both companies can add revenues and improve their profit margins by not leaving a popular trend to their competitors!

While I do expect both American Outdoor Brands and Ruger will at some point in the future offer AR Pistols, it is much harder for me to imagine either offering an AK-style rifle.

But perhaps seeing good-quality ARs selling for under $500 while an entry level US Made AK is selling for about $700 and quality AKs all sold out at $1400 may change their mind! If not, one of their competitors surely will!

I hope this article was helpful in understanding the firearms landscape and looking forward to the next few weeks!

Thank you for reading and I look forward to your comments and our 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.