One week to go until Shot Show 2019!
My schedule is getting filled up and gun companies sure do follow our work here! Two of the publicly traded firearms companies are on my calendar and looking to add the third this week.
Just as I did last year, before heading to the show I wanted to sum up the year, draw some conclusions and then formulate questions to hopefully have addressed by the various executive teams at the show.
Once again my apologies for not getting this out sooner. As you may know I have just come back to publishing from a break in 2018 for personal matters. As such our latest article in the NICS series was in May, discussing the April data.
So how's the rest of 2018 been?
Whenever the FBI gets a chance to update the December 2018 NICS data, it will most definitely make 2018 the second highest year for background checks!
Source: FBI NICS Data
WOW! BRAVO! All is good in the world! Sales must be through the roof, right?
Well... not exactly!
Of course for anyone who has followed my work here, this is not a surprise.
As we know, the headline background check data is comprised of both FFL transactions and state administrative checks. Over the years, those administrative checks, used for things such as concealed carry permits have grown. Yes, there are more people than ever getting their CCW permits but at the same time, more and more states are doing those checks more frequently, further inflating the data.
For those reasons, the industry looks at adjusted data using the NSSF methodology which backs out those administrative checks from the headline numbers. About a year ago I started compiling those numbers myself and instead of backing out background checks, I went about it the other way, using only the likely transaction checks instead, excluding things such as pawn transactions. I do hope to discuss the methodology differences with NSSF in the near future.
Once the December data gets reported, I suspect that 2018 will end up being the worst year for transaction related background checks since 2012, ending up around 12 million background checks.
The chart below shows the combined Adjusted NICS data for 1999 through 2018. 2018 number excluded December as that has yet to be reported at the time of writing.
Source: FBI NICS Data Compiled by Author
The good news for checks and data is that Handgun data will likely be okay, matching 2013 levels. It will most definitely be however significantly below 2015, 2016, and 2017 levels.
Source: FBI NICS Data Compiled by Author
The really concerning news however is that even with optimistic estimates for December, 2018 long gun background checks are most likely going to come in at DECADE LOWS! This would be consistent with the sales experienced by a number of dealers I have spoken with.
Source: FBI NICS Data Compiled by Author
What we have to keep in mind however is that 2018 was a mediocre year EVEN WITH the short term spike after the Parkland shooting in February which drove gun sales in March.
The chart below shows us the "adjusted NICS" for the month of March, from 1999 through 2018.
Source: March FBI NICS Data Compiled by Author
As we can see, March 2018 was the best March yet for handgun NICS checks and the third best for long guns, coming in behind 2012 and 2013. All three also happened to be responses to mass shootings, the Chardon High School shooting in February 2012, the ongoing gun shortage following Sandy Hook shooting in December 2012 playing out in early 2013 and of course the most recent Parkland high school shooting on February 14, 2018.
Beyond The NICS
So 2018 data will likely end up ranging from between not bad for handguns and pretty bad for long guns. Both of those would be far worse had it not been for the Parkland, Florida school shooting.
Of course, we also have to remember that NICS data is just a rough estimate of volume. It does not AT ALL talk about revenues or profitability.
I wrote in a previous article,
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
And the above equation is precisely the problem.
Not only are we seeing lower NICS volumes, but we are also seeing decade low prices on everything from handguns to rifles to ammo!
How Does This Apply To The Big 3?
Looking over the data we do have trends developing.
Yes, under President Obama there were A LOT new shooters entering the world of gun ownership. Those new gun owners generally purchased handguns. With the growth in concealed carry and expansion of carry laws, there was both, demand from new shooters AND existing gun owners purchasing their carry guns.
This was also helped that the industry pulled a shrewd business move.
With the proliferation of carry guns, both Ruger (RGR) and American Outdoor Brands' Smith & Wesson (AOBC) put out pocket carry guns such as the very popular Ruger LCP and Smith & Wesson Bodyguard pistols.
Source: Ruger LCP
When these pistols came out, they were a prime choice for a carry gun simply due to their size. As such, they were exceptionally small and easy to conceal and for women and many men, were the best gun to carry versus a much heavier, larger, and tougher to conceal full sized pistol such as a Glock 17 or a 1911. Most of all, these were "all season" ccw pistols as you can just as easily conceal them in your shorts or jeans pocket as you can wearing it IWB (Inside the waist band).
The problem is... well, it was a .380. So while you did enjoy having a pocket pistol with a 6 round capacity that you can easily conceal... they were not guns that you actually enjoyed shooting or had confidence in their stopping power. Personally, while I enjoy many Ruger firearms and bought plenty of LCPs as gifts, I HATED shooting them. The recoil profile from the .380 was just horrendous, it was sharp, violent and in that small form factor of a gun, almost torture to shoot more than 10 rounds? Most of all, it was not a 9mm.
Either way, despite the negatives, those guns were a solid recommendation and sold very well.
And THEN the industry came out with pocket pistols in a caliber that gun owners actually wanted, 9mm.
Ruger launched the LC9, Smith & Wesson launched the Shield and almost every other manufacturer now has a pocket sized pistol in a 9x19, or 9mm caliber.
And of course... people went out and bought them.
The problem today of course is that pretty much everyone that wanted one, has a CCW pistol and the market is fully saturated with offerings, at exceptionally low prices. Whomever was on the fence, will likely be looking at and perhaps picking up one of the newly announced Glock pocket pistols, the 43X or the 48.
Needless to say, it is my personal belief that the peak in new handguns sales, at least for the time being, has been reached and there will be a continued downward trend in both sales volume and prices for two simple reasons. First, the market has been saturated with offerings and any gun owner can go out today and get the CCW pistol for their lifestyle, in any caliber (that makes sense). Secondly, I do not see any innovations in the handgun industry that would spur future demand. Expanded conceal carry did that, but short of national reciprocity that would allow those gun owners living behind enemy lines to carry in their states, I do not see further growth catalysts.
As we discussed, the growth and innovation has to be on the rifle side, and we discussed two of the trends of 2018 in the article "Shot Show 2019: Missed Trends Of 2018."
The most concerning part for me however is the continuing declines in long gun sales.
Generally these are supposed to be the bread and butter sales, generated by hunters. In my mind however I am wondering... why haven't the mass influx of new handgun buyers NOT purchased as many rifles?
Are those sales still to come?
Or perhaps they are already there and it further reiterates that unlike handguns, once you have an AR-15 and some bolt action guns, you really do not need many more?
Or maybe all of those rifle sales were pulled up to the times of mass shooting reactions?
This of course impacts both Ruger and Smith & Wesson who produce very nice entry level AR-15 rifles. Unfortunately both can be had for around $500, a far cry from the $1,000 or so price point they would command in a normal market.
The other aspect to this is ammo.
If more shooters are buying handguns, it also likely means they are purchasing more handgun ammo.
While rounds being fired is the sound of a cash register ringing for Vista Outdoor (VSTO), Winchester (OLN) and the plethora of European ammo manufacturers, all of them would prefer you shoot rifle caliber ammo than handguns.
So have we hit that saturation point?
I think so.
For investors there are two stories here.
First, it does seem like we have peaked in the short/intermediate term in terms of handgun sales, both to new shooters and existing gun owners picking up their concealed carry pistols.
Second, it seems like long gun checks are not picking up or reversing trends, despite the recent shootings.
What's the light at the end of the tunnel?
For investors, I think recovery and profits will come under two scenarios, more senseless massacres and Democrat control of government. Will it come in 2 years? Or maybe 6? Until then the companies must remain financially disciplined and why just as last year, firmly believe that IF YOU MUST be invested, Ruger would be the safest choice.
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.