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NICS - August 2019: Here Comes The Bailout

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Includes: AOBC, FORZF, OLN, RGR, SPWH, VSTO
by: Maks F. S.
Summary

The FBI recently released the background checks data for the month of August 2019.

The adjusted NICS data showed a meaningful increase in the year-over-year background checks, driven by new gun control measures considered by President Trump.

Recent data is a welcome sign and a bullish opportunity for investors of Ruger, American Outdoor Brands, and Vista Outdoor.

Good things come to those who wait.

The NICS data took a bit longer to be released for August than it has in the past. Seemingly, that delay brought some great news for the firearms manufacturers and firearms & outdoors investors.

For investors of Ruger (RGR), American Outdoor Brands (AOBC), Vista Outdoor (VSTO), Sportsman's Warehouse (SPWH), or Taurus SA (OTC:FORZF), the last few months have been a roller-coaster ride as the stocks inched up with a pretty good first half of the year, only to be decimated on bad earnings in light of stabilizing NICS data.

Most recently, as I discussed in the American Outdoor Brands' earnings article, President Trump has taken a strong shift away from his "Pro 2A" position and has started to support new gun control legislation. Furthermore, Democratic hopeful Beto O'Rourke added fuel to the fire by openly stating he is coming for gun owners' AR-15s.

As discussed previously in "American Outdoor Brands Q1 FY2020 Earnings Results: I Am Now An Optimist":

As more of these actions are taken, the more less knowledgeable gun owners are starting to treat this president as anti-2A and we may be seeing the first signs of a return to previous fear based buying. We should see first proof of this in the August NICS data.

While I don't believe we will see a 20% increase in the adjusted NICS data as one analyst claimed he saw in one state, (probably Massachusetts?) I do believe we will see an increase of 5% to 10%. MA will see a bigger increase as gun owners rush out to get ahead of the new package of gun control bills being introduced, however the impact will be limited as the new bills were announced just last week. This will however have an impact on September data.

This all however leads to the 2020 Presidential Elections and while it is still quite early, we will most definitely have an increased ratcheting up of fear and uncertainty as it relates to gun rights, further sending gun owners to the stores.

Did the August background checks data show signs that the firearms and outdoors industries are about to receive their financial bailout as a result of fear based buying?

Yes, I think they are.

August 2019 NICS Data

For August 2019, the FBI reported a total of 2,366,824 background checks. The headline number is up 293,528 checks, or 14.15% from 2,073,296 reported for August 2018.

The August data is consistent with the overall seasonality of the firearms business. Vacations and the hot weather typically discourage people from visiting the range and hunting season did not yet start. After a slower summer, August numbers generally peak up as gun owners prepare for hunting season and we start seeing more new gun models hit the shelves.

What is unique this month is that the headline August data for 2019 was the highest August yet.

As always, we typically discard the headline numbers as they are heavily skewed. The headline checks include those that are related to concealed carry and ongoing background checks.

Handgun Data

Lets look at the data that matters.

The largest year over year increase came in handgun checks.

For August 2019, the FBI reported 573,323 handgun checks. This is up from 478,723 handgun checks in 2018, an increase of 94,600 checks or 19.76%.

The August 2019 number is sequentially higher than July, which is consistent with seasonal trends, YET we can clearly see a massive year over year increase giving the second highest data point yet, only behind 2016.


Source: FBI NICS data, compiled by author (August 2019 vs. month of August in prior years).

Long Guns

As we know, the "Trump Slump" has been the story of a general absence of fear based buying which introduces new firearms owners and gives current gun owners more reasons to pick up "yet another Modern Sporting Rifle."

As such, the largest year over year declines have been seen in the long gun data.

For August 2019, long gun checks increased to 390,432 from 361,705 a year earlier, an increase of 28,727 or 7.94%.

As we know, the July long gun checks were the lowest in OVER a decade. The August data is better than 2018 however it is still the second lowest since 2010.


Source: FBI NICS data, compiled by author (August 2019 vs. month of August in prior years).

What I am really interested in is to see what led the year over year increase. Was it Modern Sporting Rifles? Probably.

But did they add to an already stabilizing number? Or did MSRs substantially bail out declining traditional hunting rifles and shotguns?

Unfortunately there is no way to know the answer to that unless we have insights into point of sale data OR distributor sales.

Combined Data

Combined, August 2019 saw 1,030,929 background checks as adjusted by my methodology. This is up 141,534 checks, or 15.91% from 889,395 a year ago.


Source: FBI NICS data, compiled by author (August 2019 vs. month of August in prior years).

What Does The Data Tell Us?

Have President Trump and the Democrats sent gun owners to the stores through fear of imminent anti-gun legislation? Seemingly yes.

Let's start at the top and dive deeper into the individual data.

As we saw the combined data showed a meaningful 15% increase in adjusted NICS data.

Interestingly, the majority of the gains did not come from the expected long gun data but rather in the handgun data.

The general implication is that increases in long gun data indicates collectors and "hoarders" trying to purchase firearms that are likely to be taken away.

As the increase came predominantly in the handgun data, it would be fairly safe to credit this to new handgun buyers. This can be either people who were considering purchasing a firearm coming into the market and/or new gun owners coming of age. In either case, seeing an overall increase in NICS data led by handgun data is a very welcome sign for the overall health of the firearms market.

Further of note, while the "multiple" firearms category increased to 21,020 from 17,149 a year ago, it is an increase of only 3,871 checks. It is however an increase of 22.57% on a percentage basis which is more impressive.. In a panic type situation I would expect those numbers to increase significantly more.

What is interesting though and may give credence to the "AR-15 Lowers" being an insurance policy against potential new legislation is the "other" category. This includes AR-15 lower receivers and "other/non-NFA" firearms. These checks increased substantially from 31,818 in August 2018 to 46,154 in August 2019.

Furthermore, this includes firearms which I discussed in the last article, such as the Troy A4 and Dark Storm Industries DS-15. These firearms are extremely popular in states with stringent gun control laws such as Connecticut and New Jersey.

Diving into the state by state breakdown, what at first seemed like another local play as we saw with Oregon and Washington a few months ago.

August however really was about the fear coming back with a clear difference between the sates that saw substantial year over year increases and states that were flat to down.

The most odd state was Alabama, the first state in the list and why I thought it was an anomaly.

Alabama saw 18,831 handgun, 12,672 long gun, 1,379 other and 1,023 multi type checks for August 2019. This is up from 5,991 handgun, 5,741 long gun, 218 other and 274 multiple checks in 2018.

These are simply not percentage gains but rather multiples.

Fortunately for the industry, the checks increased pretty much across the board in states like Florida, Arizona, Ohio, Pennsylvania, Tennessee, Texas, Virginia and Wisconsin, or states where gun owners can purchase firearms with basic Federal NICS checks, without many additional local requirements.

The exception to this trend were states such as California, Massachusetts, New York, New Jersey and Washington States, or states that either have strong anti-gun legislation OR recently introduced it.

So Does August 2019 Start The New Trend?

In our last NICS article we looked at experience of a few dealers and manufacturers.

Interestingly, their experiences were generally reflected in the August data, particularly for Todd Moyer who is a Class 3 Firearms dealer, Freedom Sports LLC, in Pennsylvania:

We are seeing more uncertainty following the weekend's events than after prior similar events. Certainly an uptick in AR lower sales/inquiries in the past couple of days.

On the NFA side, lots of people seem to be considering filing Form 1's to SBR their braced pistols due to the media focus and uncertainty resulting from a braced pistol being used in the Ohio shooting. There seems to be quite a bit of talk and fear that the legality of braces may be at risk.

For the firearms manufacturers and dealers in the banned states, the experience was also consistent with the NICS data with no notable increase in activity.

Bottom Line

With President Trump considering anti-gun legislation, and a slew of Democratic hopefuls pronouncing strong anti-gun positions, gun owners ran to their closest stores in states with limited local regulation.

Simply put, they are for the first time in years starting to believe that their gun rights are under threat.

What we will have to wait and see on is whether this has staying power.

As I have stated in the last few articles over the past few months, I do believe for the time being the NICS data is looking like it stabilized and perhaps with August 2019, President Trump has pulled up the election fear cycle 12 months early.

As always though, good news for gun rights is bad news for investors and vice versa.

Today we are looking at what is likely the beginning of the reversal of the trend and while gun rights will be under pressure, the firearms industry and firearms investors should breathe a sign of relief.

I am hopeful for both Ruger (RGR) and American Outdoor Brands (AOBC) investors and I believe this uptick WILL show up in the earnings results however we have to keep in mind that the initial sales have likely helped dealers and distributors. It will be up to the distributors to order more firearms from the manufacturers and today they are still quite risk averse.

The big opportunity here is for smaller private companies such as the ones I have highlighted in the past, Zev Technologies, the makers of the Zev OZ9 modular pistol, and Troy Industries and Dark Storm Industries making modern sporting rifles for both "Free America" and the banned states, both offering 50 state compliant models. More than that, these companies have great products and the ability to deliver them in a timely manner. These circumstances have potential to propel small and mid sized manufacturers to the top tier.

While I am less optimistic, I do believe continued fear based buying will throw a lifeline to Vista Outdoor (VSTO) and return them to profitability, although without their firearms brands which were spun off. The ammunition market is however very saturated and the company just lost a MAJOR distributor of their ammunition lines, Walmart when they announced that they will no longer carry and sell handgun and rifle calibers used in modern sporting rifles. What this will do is drive more people to buy ammunition online and there, Vista is not only competing with Olin's (OLN) Winchester brand and Remington, but every other ammunition manufacturer such as Wolf, PMC, Aguila, S&B, Fiochi and countless others who will keep on putting price pressures.

We have to keep in mind is that unlike in the past, there are excesses in production capacity.

The other interesting companies to watch would be Sportsman's Warehouse (SPWH), a regional firearms and outdoor retailer and Taurus SA (OTC:FORZF), the Brazilian firearms manufacturer who dominates the lower price levels and has launched some great lower priced handgun offerings which will appeal to buyers on a tight budget in a recession.

Yes indeed, the next 12 months are surely looking interesting.

As always, I look forward to your questions, comments and our ongoing 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.