On the other hand, KeyBanc Capital Markets analyst Scott Hamann is exercising a more wary approach after the positive results and recommends SELL Smith & Wesson. Scott said he is “still cautious on the firearms industry and anticipates Smith & Wesson will face moderating demand.” Scott has a 2.6% average return over S&P-500
Scott usually puts out the negative notes between the time NSSF adj NICS are available to high-end NSSF subscribers, but before they are available to retail investors. He likes days when the entire market is plunging. He only has about twenty-four hours to get the note out, if he's going to maintain his pattern.
By the way, the February 2014 NSSF adj NICS was a very strong number, about 78% of the 2013 surge number 1,634,000. Much better comparison than the January 2014 vs. January 2013 comparison, 970,000 versus 1,790,000, or about 54% of January 2013 levels.
I agree that comparisons between two companies using different fiscal years are problematic.
SWHC has "California compliant" versions of the M&P Shield and the polymer pistols. I don't recall hearing that Ruger has any "California compliant" pistols.
Mr. Debney wants distributor inventory less than 8 weeks, which is almost exactly the same as Mr. Fifer's 6-8 "turns" (52/6=8.7 weeks, 52/8=6.5 weeks).
SWHC reported results today and shares jumped. Ruger shares declined. Which results are better?
Q4 Net Sales Growth------28%-----16.7%
EPS Continuing Ops-------33%----34.6%
Quarterly Gross Margin---35%----40.2%
Operating Margin-----------25%- ----21%
The third change is the most important. It wouldn't be much of a stretch to go from storing the names of gun purchasers who had been denied to the names of people who had been approved. Then you'd have the database you always wanted.
OK. What I really need to know is what is the celestial constant? North Star?
Jeff Buchanan CFO estimated production days in conference call Sept 5 as follows:
Est. Production Days
10 analysts' consensus revenue estimate for SWHC for the third quarter is $142 million. That is only fractionally better than revenues for the quarter ending October 31, when the factories were closed for two weeks for hunting season and ERP conversion. Then, revenues were $139.3 mn, and earnings were $17.1 million.
Simply because of the increased number of production days, it seems likely to me that SWHC will easily outstrip the estimated revenue number, and perhaps will achieve $178 million, as in the first quarter last year. I assume that SWHC is selling all its production.
Earnings estimates are more difficult because of seasonal factors (end of year accounting, January promotions for trade shows).
Newspaper writers and analysts constantly fret about the difficult NICS comparisons from the surge last spring. In my opinion, those NICS numbers are irrelevant for the firearms manufacturers, who were inventory constrained. They are highly relevant for the retailers, like Cabela's, who had plenty of inventory [I think--I have to fact check this] and could mark-up prices in the face of high demand..
We just saw Ruger beat revenue estimates, and then shares got knocked down because of missiing earnings estimates. The estimates were purged from Yahoo pages within seconds of Ruger reporting results. I suggest you print out the page of estimates, in case they disappear suddenly.
You might speculate that gross profit margins depend on (1)total sales, and (2)decreases in the fourth quarter at any particular sales level.
For example, gross profit margins were higher in 2012 versus 2011, because of higher absolute sales. But the fourth quarter in each year was a lower profit margin than other quarters with similar revenues.
If I were estimating SWHC results, if I found time to look at the filings, I would estimate: (1) Revenues will be identical to the second quarter (because production is sold out), but gross profit margin will be about 4% lower than in the second quarter, and (2)EPS will be reduced compared to Q2 because of the declining gross profit margin. Cannot compare with Q3 because of one-time issues related to new computer software at SWHC.
Freedom Group is strong in Modern Sporting Rifles (Bushmaster) and ammunition. The Cabela's CEO said in their conference call that you don't see people with a shopping cart full of ammo and a MSR anymore. So Freedom Group might be worse off than manufacturers who don't specialize in these two areas.
FREEDOM GROUP GROSS PROFIT MARGIN 2012 and 2011 by Quarter
Sales Q1 Q2 Q3 Q4
2012 205.6 233.8 237.9 254.6
2011 176.1 190.5 198 210.4
2012 70.3 80.1 82.2 81.1
2011 44.3 56.1 55.2 63.9
Gross profit margin
2012 34.2% 34.3% 34.6% 31.9%
2011 25.2% 29.4% 27.9% 30.4%
Freedom Group Guidance versus YTD results
---------------Sept 30 YTD----Full Yr Guidance-Percent change-
Revenue--$1020 mn-------$1263 mn----23.8%
EBIDTA---$207.9 mn-------$240 mn------15.4%
This implies significantly lower profit margins in Q4 for Freedom Group, although sales are continuing at same pace.
A few miscellaneous topics from the annual SEC filings:
Price increases in January are usually around 1% on an SKU-weighted basis, according to Mr. Fifer in the old conference calls.
Fourth quarter gross profit margin is usually less than the other quarters, because (1) the books are kept open a few weeks longer in the fourth quarter, so that all possible expenses can be applied against gross income, and (2) promotional expenses (e.g. buy ten rifles, get one free) are incurred in the fourth quarter, in anticipation of the January wholesaleretailer sales shows.
I miscalculated the fourth quarter EPS because I didn't realize Q4 is a bad one, in terms of gross profit margin. So the second quarter EPS was $1.63, while the fourth quarter was only $1.33, on nearly identical sales. That's mainly because of the habitual drop-off in Q4 gross profit margin.
Mr. Fifer projected $30 million capital expenditure during the year-end conference call twelve months ago. Ultimately, Ruger spent $55 million. What accounted for the surge in CAPEX?
2013 CAPEX was as follows:
Land and improvements-= $0.5 million
Buildings and improvements=$9.5 million
Machinery + Equipment=$38.5 million
Dies and tools=$5.0 million
Total CAPEX=$54.4 million
Most of the $10 million for land and buildings may have been for the new Mayodan facility. Most of the excess unantiicipated CAPEX may have been for machinery and equipment.
This suggests to me that at the time all the machinery was ordered, mostly in the third and fourth quarter, Ruger management was optimistic about the future. Had they been pessimistic, they would not have purchased any new machinery. They were not nearly as pessimistic have investors have been recently.
SEC Form 10-K says on page 27 there were 604,900 shipped in 2013Q4. Is that what you are referring to?
I see you're still posting "whisper numbers", even though you wrote your "last message on the board".
I thought the plunge in Ruger shares after earnings was manufactured by the media and the shorts, street-theater..
Reading through the 10-K, I can't find anything extraordinary, except that Ruger sold every firearm they could manufacture. Mr. Fifer doesn't give forward guidance. He said retailers ordered from distributors at levels that exceed 2012 levels, and lagged 2013 levels.
The only thing concrete that has been said that is negative is that Ruger "missed earnings estimates". It actually beat Scott Hamann's prediction of $1.29 per share, and beat on revenues. The other analysts are so obscure and little-known that nobody thinks much about what they say. Yahoo deleted the estimates almost immediately, so we can't review the timing and the identity of the analysts, one of whom has now gone missing. There were three analysts briefly, now there are two.
There are still paid spammers posting on this message board, so there is still a large short interest. I wonder if they went short January 1, 2014, or maybe January 1 2013, in which case they're way underwater.
Mr. Fifer said that gunbuyers are more female, and younger. Owning a firearm is more socially acceptable than a few years ago, even in the Norheast.
Exports--not a factor. United States is by far the largest civilian gun market.
Imports--there market share has remained constant. Some countries, like Brazil and Austria, import to the U.S. but keep their home markets closed.
Question: Is the gun market slowing?
Mr. Fifer: Market ebbs and flows. Summer of 2008 to summer of 2009 saw a huge surge, then a fall-off for three quarters. In 2011, manufacturing started to pick up again. The base of firearms consumers is much larger than 6 years ago.
Chris Killoy promoted to President, will become COO. Fifer remains CEO.
END OF NOTES:
Overall, I thought it was a good conference call. Scott Hamann was very respectful and I agreed with him that it is quite difficult to forecast Q1 orders. By the way, he estimated $1.29 EPS for Q4, and had raised his estimate several times. Still he was too low. Yahoo Finance raised their consensus estimate about a month ago by adding a third analyst, who has subsequently vanished from the lists.
About one year ago, on January 17, I printed and saved the Yahoo Finance estimates so I could keep track ot them. Ruger shares were at $52.56 each on that day. Forward estimates for 2013 were $3.15, and the low estimate was $2.85. The estimate for 2013Q4 was approximately $0.75. That shows you how fluid these estimates can be.
Today, more than 2 million shares were traded, more than 10% of all the shares outstanding. Remarkable.
I listened to the conf call, and took a few notes:
Mr. Fifer said he will try to fill 40,000 square feet per year with new lines at Mayodan, if I heard correctly. It is used for machining, assembly, and gluing, but does not have a furnace yet--that would be too much complexity for a new plant. The Mayodan plant may reduce the "cycle time" between when a product is designed and when it enters production. Workforce about 100 persons.
Ammo shortage, especially rimfire ammo, is inducing consumers to defer purchase of rimfire weapons. He has no plans for Ruger to produce ammo unless an ammunition manufacturer is available for sale at an attractive price, which would be 5x or 6xEBIDTA. Private equity is competing with Ruger, and is able to pay 9x-10x EBIDTA because they have a short time horizon.
Mr. FIfer would not forecast 2014 demand. Said he will not stuff the channel.
Wants distributors to have 6-8 turns of inventory on hand, not 12- 14 turns. I assume that means if 2.4 million units produced annualy, 8 turns would be 300,000 firearms in inventory. Distributors try to carry only 12-14 turns level of inventory, but this results in lost sales.
Scott Hamann asked about the first quarter orders, and Mr. Fifer seemed to say that they were stronger than 2012 but weaker than 2013 at the trade show. I could not hear the entirety of this exchange, and await the written transcript.
Gross margin contraction in Q4 caused profits to be lower than one would predict based on units sold. Main reason was a reduction in (high-margin) magazine sales versus last year., Other factors included depreciating machinery over 7 years instead on 10 years, and unexpected $2 million costs at Mayodan versus preceding quarter, and accrual for distributor inventory for spring promotions of $2 million.
California microstamping: political technology. Will reduce sales by 28,000 handguns at $300 each, or $8.4 million in sales. That will take $5 million off margins.
It appears to me that inventories have built up to a 6-week supply at the distributors. The inventories at retailers are unknown and unknowable. I wonder what is a "healthy' level of inventory to have on hand....it sounds to me as though Ruger management and the distributors argue constantly about the proper level, discussing inventory "turns"..
By the way, the 10-K says there are 15 distributors for the domestic commercial market, 25 for the law enforcement market, and 2 for the Canadian market, a total of 42 distributors, mainly Davidson's 16%, Jerry's 14% , Lipsey's 14%, and SportSouth 11%..
Inventories at Distributors (from SEC filings 10-K and 10-Q):
Rate of units shipped=1,696,400 in 2013=141,000 per month.
I still haven't looked at the Cabella's 10-Q filing, so I don't know how much their sales slowed on a same store sales basis, versus an absolute basis. The 8-K filing did not have enough detail, and the 10-Q wasn't available when I looked. They are building a lot of new stores, some in the same city such as in Denver..