Jump to content

RGR and SWHC - Gun Makers- Cheap or a Value Trap?


ok22
 Share

Recommended Posts

RGR and SWHC seem cheap.  What do people think? 

 

The primary valuation depression driver is that gun sales are in a bubble and will soon decline to "normal levels." 

 

However I bought and sold RGR in the teens a long time ago for a small profit.  Was scared away by the same logic and now feel like a complete idiot. 

 

The FBI checks level for the recent 12 months show pre checks are lower than the post Sandy Hook run up against concerns about greater gun controls.  But the levels are still higher than old normal.  Is this a case where the new normal is a higher number?

 

Both stocks are crazy cheap if you believe demand and hence FCF stays flat or slightly increases.  But there is the rub.  Hoping there are people on the board that know more about gun demand and this industry than I do.

 

Here are my thoughts:

 

RGR:

Pros

1.  Great management

2.  Expanding production

3.  Great new product intros

4.  Taking share

Cons

1.  The macro gun sales bubble

2.  How much demand has been pulled forward

3.  What is the replacement cycle if demand was pulled forward?

 

SWHC:

Pros

1.  Got rid of money losing lines

2.  More efficient operator than it has ever been before

3.  Turned around?

 

Cons

1.  Macro gun bubble

2. Narrow product line

3. Historically spotty and often poor capital allocation and governance

4.  Historically more demand swings from its core customers

 

Overall thesis for both:

1.  Gun demand bubble concerns are priced in

2.  Great cash generation and ROI

3.  Demand and supply well in favor of manufacturers

4.  Private competitors are a disaster (Freedom etc.)

5.  Seems like a Duopoly

6.  Gun demand has a new normal that is lower than post Sandy Hook but higher than history

7.  Drug dealers are probably loved more than this industry (not that this is a major factor in decisions)

 

 

 

Link to comment
Share on other sites

I did work on SWHC. Liked everything I saw but had no insight into the most important factor, which as you say is whether demand has spiked temporarily or is the "new normal".

 

I have no idea, hence the too hard pile.

 

Maybe the way to approach it is to look for a level of downside protection in the assets, normalized earnings (i.e. assuming that current demand is temporary), and brand value. If you value those factors within the current market cap range, that could be a good thesis for a purchase.

Link to comment
Share on other sites

Hey all:

 

There is a large sporting goods store that I go to that has a large fire arm section.

 

A few months ago, there were ammunition shortages.  Most guns were also sold out, especially rifles.

 

Was there last weekend, shelves are stocked with rifles, close to pre-panic levels.  Ammunition is still not quite up to prior levels, but is close.  Prices are higher, but not tremendously.

 

I think gun sales will continue at elevated levels for the indefinite future, BUT not like what it was.  Most people who wanted something have gotten it...

 

I guess you can only so many guns and so many cans of ammunition?

 

I think the gun maker's earnings will probably be coming down in the future.

Link to comment
Share on other sites

http://www.fbi.gov/about-us/cjis/nics/reports/total-nics-background-checks-1998_2013_monthly_yearly_totals-033113.pdf

 

Thanks for the responses.  All responses seem to think demand is in a bubble.

 

Here is the link that is commonly used to give insight into demand trends.  Are the expectations built into the stock prices that demand falls to below the 1m level?  Demand obviously was way high in late 2012/early 2013 but if current 1m+ monthly levels stay steady is that not good for the stocks?

 

 

Link to comment
Share on other sites

I have no doubt that there is a bubble and it has probably topped out for the time being, but there are a lot of new gun owners out there as a result.  I took my kids the the range on Sunday and the place was full of first timers looking for instruction on how to use their new guns.  I work with a number of people who are all gun owners for the first time as well.  The promising thing about this is that in non-bubble times the thing that most gun buyers have in common is that they already own guns.  More gun owners can only be good for future sales.  Not too many people own just one gun.

 

Also in your first post you mentioned a question about the "replacement cycle".  I'd argue there really is no replacement cycle with firearms.  Most guns last a lifetime and are passed down to future generations.  It is more about adding to your collection than it is about replacement of broken or worn out items.

 

A good strategy would probably be to buy these in the middle of a republican administration then wait for a democrat to be elected and cause another panic.

This cycle has happened exactly this way before and probably will again.

Link to comment
Share on other sites

  • 3 months later...

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...