Seeking Alpha

NICS - September 2019: More Signs Of A Rebound

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

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

The adjusted NICS data showed a meaningful increase in the year-over-year background checks, continuing the August 2019 trend, 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.

It certainly looks like it is becoming sustained.

As we discussed in the August NICS article, firearms sports and outdoor investors in companies such as Ruger (RGR), American Outdoor Brands (AOBC), Vista Outdoor (VSTO), Sportsman's Warehouse (SPWH) and Taurus SA (OTC:FORZF) received great news as the August 2019 background checks data showed a meaningful year over year increase.

Unlike in previous years where we saw temporary year over year increases as a response to a domestic terrorism event, August's increase, was not an anomaly and was actually the 5th month with year over year increases in 2019.

Did the trend continue in September?

Yes, Yes it did.

September 2019 NICS Data

For September 2019, the FBI reported a total of 2,207,312 background checks. The headline number is up 250,631 checks, or 12.8% from 1,956,681 reported for September 2018.

The data also remained consistent with regular seasonal trends.

Furthermore, just as we saw with the August data, the headline September 2019 NICS data was the highest September yet.

As typical, we must look deeper into the numbers as the headline checks include those that are related to concealed carry and ongoing background checks.

Handgun Data

Lets look at the data that matters.

Just as last month, the largest year over year increase came in handgun checks.

For September 2019, the FBI reported 486,169 handgun checks. This is up from 434,660 handgun checks in 2018, an increase of 51,509 checks or 11.85%.

The September 2019 number is sequentially a little lower than August, which is in line with recent trends.

Interestingly, the year over year increase for September was lower than Augusts, thus implying that while there was a demand spike, the velocity of the growth may be moderating.


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

Long Guns

Last month I wrote:

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.

It is therefore a good sign to see those types of sales have continued to improve. As we know, the July long gun checks were the lowest in OVER a decade!

For September 2019, long gun checks increased to 398,229 from 370,532 a year earlier, an increase of 27,697 or 7.47%.


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

This is obviously great to see. One cautious note however is that just like August, while we did have a substantial year over year increase, it was the second lowest in over a decade!

Combined Data

Combined, September 2019 saw 945,985 background checks as adjusted by my methodology. This is up 92,759 checks, or 10.87% from 853,226 a year ago.


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

What Does The Data Tell Us?

In many ways, September was a continuation of August's fear based buying with increases across all categories.

What is interesting this month is that the increases in categories were a bit more balanced, rather than the substantially larger increase in handguns.

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.

Once again, we did have major increases in the "other" category which would be non-NFA firearms along with parts such as AR-15 Lower Receivers which we can view as insurance against future bans.

Looking at the state by state breakdown we do see some of what we saw last month but also some new things.

Just like last month, we saw large percentage or even multiples in the increase in background checks in states like Alabama, Florida, Pennsylvania, Tennessee, Texas and Virginia.

Unlike last month however, the increases also came from some states with stringent gun control like New York and New Jersey.

The gains in those states were also showing up in long guns. In New Jersey, much of those gains came from sales of "other firearms/non-NFA" firearms such as the Troy A4 and Dark Storm AR-15 firearms we discussed in the past.Will These Increases Turn Into Profits? What About Colt?

Over the last month, there was much news in both the national media and the firearms communities that iconic firearms brand Colt Manufacturing would cease selling AR-15s to the civilian market.

The initial reports instantly brought up theories on both sides. Smart investors realized that either the company was merely the next one on the list in a bad financial position, and/or likely needed their production capacity for a government contract.

Immediately afterward, the company announced a $42 million government contract to provide the military versions of AR-15s for 14 foreign governments, running through 2024. The company then issued a follow-up press release clarifying that the stoppage to civilian sales was due to poor sales. While Colt is an iconic brand, unless you have nostalgia to purchase a "Colt AR-15," there is very little reason to do so.

Personally, and many gun owners would agree, Colt's best days ended when they stopped producing the legendary Colt Python, and poor business decisions were reinforced by not restarting production as it became the primary firearm used by the protagonist in hit series The Walking Dead.

Poor management led the company to seek bankruptcy protection in 2015. The stark truth is, as per ATF data, the company only produced 13,942 rifles in 2017.

This is more in line with small rifle manufacturers such as LWRC and Stag Arms, producing 12,413 and 10,932 rifles respectively in 2017, than other iconic brands such as Ruger and Smith & Wesson, producing over 650,000 and 265,000 rifles in the same year. While 2018 data is not yet available, I don't foresee much tangible difference.

The bottom line for Colt: It was merely a smart business decision to stop chasing the civilian sales and to focus on the government contracts.

The 14,000 or so rifles that Colt produced, even if they were all made for civilians, would quickly get absorbed by the other established manufacturers, with both Ruger (RGR) and American Outdoor Brands (AOBC) being in the position to capitalize.

Bottom Line

Without a doubt, these recent increases are really good for the industry and overall, 2019 will be a positive year to buck the overall "Trump Slump."

The problem is, the fear based buying binge of 2019 is very different from 2016 and prior years. In my opinion, there are two key differences.

First, there is a meaningful excess in production capacity and there is already an elevated amount of inventory throughout the channels.

The second difference is that the distributors and dealers are generally being meaningfully more conservative in terms of bringing on excessive inventory, especially as a number of distributors and many retailers have closed up and/or become insolvent.

Both of those factors are for the time being, are maintaining a cap on prices that a dealer can charge and the inventory levels they are willing to bring in.

I suppose one way of explaining the dynamic of fear-based buying is the analogy of a virus. The first time it affects you, as your body is unprepared, you have it hit and hit hard.

The second time you run across the virus, your body already has some built-up immunity. You may still get sick, but it may not come on as quickly or severely.

Bottom line, though, with the current stabilization trends and the meaningful double digit increases in both August and September, I believe will start showing up in the financial results of our public traded companies.

As always, I hope this was helpful and 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.