Source: Thompson Center LRR & Leupold Mark 5HD
It's that time of the month again, the latest NICS data is out.
Over the previous few months, I was thinking and discussing with editors on how to frame this series. My goal is to present the relevant data so that you, the investors can use it to guide and "check" your current expectations, adjusting your positions as necessary.
What my goal is going forward is that once a month, as the new data is released, we will take a deep dive into the background check data and discuss its impacts. What we will also do is discuss a broader theme that may impact sales of firearms, ammunition and outdoor sporting goods starting with most recent events.
Over the weekend, we learned of a horrific event where a public employee decided to cause harm to others. Unfortunately, firearms were used. What makes this event unique however is that unlike the shootings that occur daily in places like Chicago, this shooting occurred with legally acquired handguns by someone with military training. Shockingly however, the gunman used a legally purchased suppressor, a process that currently required an additional $200 tax (on top of the $500 to $1,500 for the suppressor) and the current 10 to 12-month wait. More concerning perhaps are President Trump's remarks on suppressors.
So what's the latest data like? How do I believe this event will play out on future sales? Would restrictions on suppressors impact the investors of Ruger (RGR), American Outdoor Brands (AOBC), Vista Outdoors (VSTO), Sportsman's Warehouse (SPWH) and Olin (OLN)? Let's take a look.
May 2019 NICS Data
For May 2019, the FBI Reported a total of 2,349,309 background checks. The headline number is up 346,317 checks, or 17.28% from 2,002,992 in May 2018.
Sequentially, the May headline checks number is also up from April.
Hooray, great numbers, right?
Not quite. As we know, we can generally disregard the headline number and particularly this month. The state of Illinois ran 342,314 background checks related to carry permits, up from just 193,052 last year.
Furthermore, the state of Indiana ran 266,081 background checks for the same purpose, up from just 51,000 or so last year.
Both of these heavily skewed the headline numbers.
Looking at the adjusted background checks data we do see some fairly good news. Once again, we look at the adjusted background checks as they are the more widely accepted data serving as a proxy for realized gun sales.
The FBI reported 491,319 handgun checks. This is up from 488,120 handgun checks in 2018, an increase of 3,199 checks or .65%.
While the data is slightly higher, both 2018 and 2019 are at 5-year lows. At least we can say that we now have our second month this year where we had year-over-year increases in handgun checks, with January 2019 being the other month.
Source: FBI NICS data, compiled by author (May 2019 vs. prior years)
Long gun checks were once again the weakest data point this month and are honestly getting a bit concerning, as much if not a bit more than last month.
For May 2019, long gun checks decreased to 291,121 from 300,466 a year earlier, a decrease of 9,345 or 3.11%. This is the lowest May in nearly a decade! May 2019 was the lowest since May 2010.
Source: FBI NICS data, compiled by author (May 2019 vs. prior years)
As I stated last month, May is a fairly important month as it is the first month in the first quarter where the year-over-year numbers would not be impacted by mass shootings and would hopefully show us some normalized data.
Unfortunately for us though, May 2018 was not a totally clean data point and we will get into it shortly.
Combined, May 2019 saw 845,612 background checks adjusted by my methodology. This is up 4,029 checks, or .478% from 841,583 a year ago.
Source: FBI NICS data, compiled by author (May 2019 vs. prior years)
What Does The Data Tell Us?
As discussed, the headline data does not matter much and should not be focused on.
After seeing the May data, I was quite pleasantly surprised to see the adjusted data stabilize. It did leave me a bit puzzled to see what was driving it and as such I went digging for more.
As discussed, the long gun data was weak across the board and there were generally no surprises there. What was a tad surprising was the increase in handgun checks. Once we look deeper into the data we do find the answer.
As mentioned previously, year-over year-handgun data increased by 3,199 checks or .65%. The reasons for the increases? California and Washington state. California's handgun checks increased to 36,314 from 34,433 a year earlier, an increase of 1,881 or 5.4%.
Washington State's handgun checks increased to 18,141 from 15,131 a year earlier, an increase of 3,010 or nearly 20%!
Source: FBI NICS Data May 2019
The reasons for both? New gun legislation taking effect in June and July, much in line with expectations and as which we discussed in previous articles.
The 4,891 increase in the handgun checks for the two states accounts for both the year-over-year increase in handguns and combined checks.
Not wanting to leave it at that, I reached out to a long-time reader who happens to be a firearms manufacturer in the Pacific Northwest, Matt Ridenour, CEO of Zev Technologies, a producer of premium firearms such as the recently announced Zev OZ9 pistol.
In general, we don’t see much of a change in underlying demand in the market. As has been the case for a while, where there has been a shift in demand it seems to be driven by concern of potential regulation (as in Washington and California). ZEV’s growth is driven by innovation and we’ve had a good year so far as we continue to release new products on a consistent basis.
What About Suppressors?
Generally, what we have learned from previous acts of terror and mass shootings is that they are primarily committed by deeply disturbed people with a history of mental illness and who were otherwise prohibited from owning firearms.
While there is still plenty of speculation about the Virginia Beach shooting what we do know up to now is that the suppressor was allegedly legally purchased.
What is quite shocking to gun owners that I know is that people who purchase NFA-restricted items, such as suppressors and machine guns are the most law-abiding people that you would meet.
I am sure most shocking for many to learn would be that in countries like Norway and New Zealand, two places touted as models for "gun control," suppressors are not regulated AT ALL and can be purchased by anyone for any firearm. In most of Europe, generally, if you have the legal ability to purchase a firearm, you can purchase a suppressor.
In the United States however, as we discussed, suppressors are regulated under the NFA (National Firearms Act) and in states where they are legal to own, gun owners and would-be suppressor owners are required to pay an additional $200 tax stamp and wait a current 10 to 18 months for the ATF to conduct their background check. Until then, your suppressor is held at a dealer.
As such, what is sold over the counter in other countries is an exceptionally costly and time-consuming purchase in the United States, particularly when you factor in the costs.
A Ruger suppressor for your Ruger 10/22 or other rimfire firearm will cost around $350 to $400 while a suppressor for a larger pistol or rifle such as those produced by American Outdoor Brands Gemtech brand will cost between $650 to $1,500.
Factoring in the sales taxes and the $200 tax stamp per suppressor are not going to give you the final costs as you have to account for the dealer's transfer fees. As mentioned, after purchasing the suppressor there is currently a best case wait of 10 months during which a local dealer must inventory and hold your suppressor while the ATF conducts their background check and processes the paperwork. Those dealers are generally going to charge anywhere between $75 to $200 to hold your suppressor during this time.
As such, and I will use myself as an example, I am in the middle of waiting the current 10 months and paying twice as much in fees than what I paid for a suppressor.
This is why suppressor owners are some of the most model law-abiding citizens. You generally do not have criminals paying $800 and waiting a year to possess something that you can purchase over the counter for around $20 in New Zealand.
So why are suppressors sold over the counter in many of the strictest gun control countries?
In fact, it is generally considered the "polite" thing to do to use a suppressor when shooting or hunting as you would reduce the noise pollution by anywhere between 20 to 40 db.
For those that are not familiar, there is no such thing as a "silencer" portrayed by Hollywood. A GREAT suppressor and ammunition made to shoot "quiet" will generally suppress a 9mm handgun being fired to approximately 120 db, the equivalent to a running chain saw. A Boeing 737 taking off is approximately 100 db when you are over 300 meters.
A rifle such as an AR-15 firing a .223 round is generally not considered "hearing safe" as most will be at or around 140 db when fired. This is like being on an aircraft carrier deck or by a jet taking off at 25 meters away.
In much of the world, suppressors are not considered as devices seen on TV but rather as devices that are preventing hearing loss and noise pollution.
The impact on investors is that President Trump has most definitely put the nail into an investment theme gun owners were hoping for, the passage of the Hearing Protection Act.
Source: White House.Gov Briefing
During the later years of President Obama's term in office, there was a growing movement towards the passage of legislation that would ease the costs and burdens of owning suppressors. President Obama even removed the restrictions that required a chief law enforcement officer of signing off on your application and changed that to a simple LEO notification.
The Hearing Protection Act would allow the sales of suppressors much in the same fashion as firearms, with a background check, without the $200 tax stamp.
This is why many companies and investors got into the suppressor business, perhaps paying top-dollar believing the bill would pass.
So how does this impact investors?
While many still held hope for the passage of the HPA, my personal belief was that the door was shut back in November with Democrats regaining control of the House of Representatives. My only hope was that the HPA would be bundled into a broader bill.
Today however I believe we can most definitely rule out a spike in suppressor sales as President Trump effectively ruled it out and would look hypocritical if he signed it in the near future.
So what's the investment damage?
I do not believe suppressors will be made illegal and we will continue to see suppressor sales at the current weakened state. They will remain the $400 to $1,500 sale and a longer wait time.
What most investors fail to consider however is that even if the HPA passed, after the initial spike in suppressor sales, suppressor prices would most certainly drop to the prices seen throughout the world, if not cheaper, as suppressors are generally common designs that are easy to produce. In fact, you can effectively suppress a firearm with a $2 piece of metal and a $5 oil filter (on top of the $200 tax stamp of course), but you get my point.
In a sense, by having suppressors be a controlled item, manufacturers can continue to sell them to people who can afford them and choose to spend $1,000 and 10 months, while enjoying healthy profits on lower sales volume.
As it relates to Ruger, I do not believe there will be any material downsides as they only manufacturer two suppressors, the Ruger Silent-SR which is a compact $449 rimfire suppressor and the Silent-SR ISB, which is an integrally suppressed barrel for the popular Ruger 10/22 model. In fact, I believe there are more upside opportunities here if Ruger starts creating centerfire pistol and rifle caliber suppressors for their handguns and very popular bolt action rifles.
American Outdoor Brands has more exposure to this space as they had in recent years purchased Gemtech, a suppressor company which we had discussed before.
While Gemtech is a very good suppressor company, much of what they are known for is their use in military and law enforcement. Assuming that is still true, any potential restrictions on suppressor sales would have less impact as it is quite doubtful suppressor restrictions would be placed on military and law enforcement.
Overall though, I do believe Gemtech has the ability to capture market-share as the market leader here is SilencerCo, who controlled an estimate 65% of the market as of a few years ago.
The companies who would further be impacted would be ammunition manufacturers such as Vista Outdoor who produce a number of products that are geared towards suppressors and retailers such as Sportsman's Warehouse.
Both companies enjoy higher markups and further suppressor restrictions would impact sales.
To put this into perspective however, investors need to keep in mind that the overall suppressor market today is still quite small.
As per the American Suppressor Association and the published ATF data, there are currently around 1.5 million suppressors registered with the ATF versus the 12 million or so firearms sold each year.
I suppose what would be interesting to see is if in fact suppressor sales pick up in response to the shooting?
The "Goldilocks" scenario for suppressor sales and investors would be suppressors remaining a controlled item with the tax stamp but with the 10-month backlog cut down to something more reasonable such as a month. This would most certainly drive up sales as while the additional $200 is an issue, the biggest current turn off for would be suppressor buyers is the yearlong wait.
What Does The May Data Mean For Investors?
There was nothing in the May 2019 data that I believe should be changing investment outlooks for any of the companies.
If you have not done so already, please take a look at my complete outlook from last month's article, "NICS - April 2019: More Bad Industry Data Likely Won't Affect Ruger And American Outdoor Brands."
The data continues to be slightly weaker as we try to find some semblance of normalization.
Promotional activity seems to be picking up a bit as Beretta just launched a massive rebate for their new polymer pistol, the Beretta APX, offering a $100 rebate by mail.
This rebate is for all variants, the compact, carry and full-sized models and lets gun owners purchase a carry sized Beretta for as little as $299.
The APX competes with offerings from both companies, Ruger and American Outdoor Brands' M&P line and will create some headwinds for the next two months.
Doing some channel checks including a gun community get together, the range/dealer was sold out of APX pistols, including the 40 S&W model that had been sitting out in the case for 5 months.
Personally, even though I had ZERO interest in the APX, I am going to go look at one, heck, $100 is $100.
It will be interesting to see if and how American Outdoor Brands responds. In the past, they offered both consumer rebates and deals to dealers/distributors.
Generally, consumer rebates tend to be more visible and drive traffic rather than dealer deals, such as "Buy X get Y Free" where it merely lowers the cost.
Beyond the Beretta rebate, a visit to a local Walmart gun counter made me aware of some Bushmaster and Remington rebates on both bolt action and MSRs.
All in all, for retailers, there should be some good news for June as we have both, the promotional activity and the response to the Virginia Beach shooting.
I am generally encouraged by the May data for the simple reason that it was not dramatically lower. We do have to keep in mind that the year over year increase was most certainly temporary as it was due to an increase in two key states, where gun owners were getting ahead of imminent new gun control measures.
If we exclude those gains then we have a flat to slightly lower year over year number for handguns. Long guns continue to be the story with near decade low numbers.
If we exclude the growth in precision rifles, it would be fairly safe to assume that traditional long gun sales including modern sporting rifles would be down, along with the regular seasonal hunting trends.
This would coincide with what I am also seeing in terms of promotional activity on AR-15 variants on the typical gun deals websites.
Looking ahead, June will be a good month to look at and should be more "clean." I expect another flat to down month, offset by incremental new purchases as a response to the Virginia Beach shooting.
Speaking with my sounding board for suppressor sales, my intuitions were confirmed:
We have customers calling and initiating the purchase of suppressors (first time buyers and existing owners) citing the VA Beach shooting as the catalyst. They're concerned about possible additional restrictions being placed on suppressors and referencing the bump stock restrictions initiated after the Las Vegas shooting. - Todd Moyer, Freedom Sports LLC, PA
As such, while we will certainly see an uptick in suppressor sales, we may also see some incremental sales of "suppressor hosts," or new firearms purchased to be used with suppressors.
I hope this was helpful and look forward to your comments!
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