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Sturm, Ruger & Co. Inc. Message Board

  • puzzled48 puzzled48 Apr 19, 2013 10:37 PM Flag

    What is a proper P/E for Ruger?

    Ruger is a technology company, and trades at a trailing multiple of 13.4 earnings. To decide what P/E is appropriate, we need to consider myriads of variables, including growth rates, solvency risk, risk of extirpation by liberal Democrats, and whether the company is a growth company, or cyclical.

    I assume that Ruger is a growth company, not cyclical, If people can purchase two or three Apple phones at $500 each, they can purchase two or three firearms, one for the bedroom, the family room, and the front hallway. If there are 300 million people in the United States, and 300 million firearms, there is only one weapon per household, and quite a bit of potential growth. One of our two major political parties is pursuing long-term policies that stimulate gun sales, possibly by accident, and not by design. For me, a cyclical purchase would be a home, or a yacht, which would depend on high employment and a strong economy. A noncyclical would be an item such as food or medicine, rather low-priced and essential for life. Firearms seem to fit this description. So growth could occur from population growth, increased per capita utilization, and miscellaneous factors such as import restrictions and trade wars, which may be on the horizon. Also, expansion into ammunition manufacture, by purchasing a Freedom Group asset.

    If Ruger is a growth company, what is the forward growth rate? If it is only zero percent, and Ruger trades at 10x earnings, than the stock is yielding 10% in dividends and capital gain to its shareholders, and is fairly valued. If the growth rate is 5%, it is worth slightly more than 10x earnings, and at 15% the stock probably deserves at least a 15x multiple. So I conclude that Ruger must be worth at least 10x earnings, and possibly 15x or more, depending on the actual growth rate.

    Solvency risk is low, as long as management avoids debt. That depends on retainiing the present CEO, Mr. FIfer, and the present Board. [CONTINUED]

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    • Risk of extirpation by Democrats is nonzero, and is correlated with the large short position in Sturm Ruger shares.

      Summarizing, the P/E ratio for Ruger depends on assigning the proper growth rate to the future earnings and revenues. 10x earnings corresponds to flat growth, at current LT interest rates of 1%, Theoretically, 5% growth per year would deserve a sky- high PE ratio, at 1% LT interest rates, if it could be maintained for 20 years. The duration of growth, the rate, and the background interest rates are what we need to consider.

      The folks at Cerebrus, who are proposing to take Freedom Group private (Stephen Feinberg et al), seem to think that firearms companies have excellent long term prospects. So do the investors at CALPERS and CALSTRS, who owned shares in Ruger and Smith Wesson until a few days ago, and who may still own Freedom Group and Bushmaster.

      • 3 Replies to puzzled48
      • Your population count also includes the many very elderly who also aren't as likely to be gun buyers.

        Guns are a very durable good. While nearly everyone likes to have the latest thing, still a gun will last a lifetime if rarely used. A very large portion of gun owners have them only for protection (like me). Many of them only rarely fire them for practice. Few of them feel the need for the latest thing. Many of them buy a gun only once in a lifetime, buy few accessories and little ammunition.

        The point is just that the population of multiple gun buyers is much smaller than you seem to imply by your numbers.

      • I agree that Ruger should be characterized as a growth company. But don't you think politics accelerated the growth substantially for the past few years and the growth curve is likely to correct for that by turning down at some point, then resume growth from a lower level? If that were to happen, then even a much higher P/E would produce stock prices substantially lower than your numbers would indicate.

        Your population count includes children. That doesn't seem appropriate.

      • I think you made an error in one of your key numbers. Even forgetting trailing earnings and using the greater earnings number of 4X last quarter you get annual earnings of $4.08. 10X 4.08 is only $40.80 share price.

 
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