Wired Weapons And Triggers For Kids

Investor's Business Daily

Firearms and security companies face slowing sales as military campaigns wind down and crime rates in the country hover near historic lows.

Sturm Ruger (RGR), one of the top U.S. gunmakers, is projected to see revenue slip 6% in 2014 after three years of healthy double-digit sales increases. Revenue growth at peer Smith & Wesson Holding (SWHC) is expected to slow to 5% this year and to less than 1% in 2015.

An October 2013 report from IBISWorld said industry sales grew an average 8.4% a year from 2008 to 2013. That includes military arms such as grenade launchers as well as small firearms and small-arms ammunition, which accounted for 65% of the total.

IBISWorld projected the sales growth rate for guns and ammunition from 2013 to 2018 will drop to an average 4.5% per year.

Firearms sales aren't about to fall off a cliff, IBISWorld analyst Andy Brennan told IBD. But it looks like they'll stumble a bit, starting this year.

"We still expect positive growth in 2014," Brennan said. "We're thinking about 6.5% this year. But that's well off what we experienced in the last two to three years. We estimate sales grew 20.2% in 2013.

Across the firearms and security industries, companies are responding with new products and new technologies to appeal to new customers — including children.

"What we've seen in the industry is it's really chasing young consumers," Brennan said.

"They're introducing models that are lightweight, to get them into the hands of children to boost demand when they become adults," he added.

Private firearms maker Chipmunk, for example, says on its website it sells "quality firearms for America's youth.

And Milton, Pa.-based Cricket Rifles says it got its start in 1994. "Working with design engineers, consulting gun manufacturers, and trademark experts, they created the Davey Crickett single-shot .22-caliber youth rifle and secured the rights to the logo 'My First Rifle,' 'Crickett' and 'Davey Crickett.'

Most such guns are used for hunting or, more often, target practice.

"Hunting has declined, but people love going to a shooting range," Brennan said. And it's often a family affair. "It's become a hobby. People used to go out walking and hiking but shooting now competes with those.

Last month, at the Shooting, Hunting, Outdoor Trade show (SHOT) in Las Vegas, the nation's largest trade show for professionals involved with shooting sports and law enforcement, guns with pink and purple handles — designed to appeal to women — were in high profile.

Analysts say pink-handled guns for women and lighter ones for children aren't likely to boost sales significantly, but can be seen in part as a desperate measure to try to stave off slower growth.

The Fear Factor

Department of Justice figures show violent crimes in the U.S. fell from 80 per 1,000 adults in 1993 to 24 per 1,000 in 2012. But gun opponents react strongly to tragedies such as the Sandy Hook elementary school shootings in December 2012 by renewing calls for legislation to limit or ban sales of certain firearms, like the popular AK-47 repeating rifle.

Gun owners and people fearing they won't be able to get weapons in the future also react strongly — by stocking up on guns and ammunition.

Such concerns were stoked by the election and re-election of a president promoting anti-gun legislation. This helped firearm sales nearly double from 2004, when the industry sold $7.97 billion of products, to 2014, when sales are projected to hit $15.7 billion, IBISWorld said.

Last year, Smith & Wesson sales surged 43% to $588 million. Sturm Ruger sales jumped 50% in 2013. Both stocks have fallen sharply from January highs. But the Security/Safety group ranks a strong 39 on IBD's list of 197 industry groups, buoyed in part by some smaller names, including security new issue Allegion (ALLE).

In addition to firearms makers, the group includes Taser International (TASR). Taser is known for its electronic stun guns, widely used in law enforcement. Taser's stock boasts a 94 IBD Composite Rating, meaning it has outperformed 94% of all stocks on key metrics such as sales and profit growth.

"Our biggest differentiator is our understanding of the law enforcement and safety niche," CEO Rick Smith said.

In February 2012, Taser introduced the Axon line of on-officer wearable cameras and Evidence.com, a website to help agencies build digital evidence systems.

Smith said the company, which is frequently sued, has special knowledge about evidence management.

"We litigate a lot. We know the types of cases our customers deal with," he said.

Smith declined to name specific market areas that Taser plans to enter because the company is in a quiet period ahead of Q4 earnings results on Feb. 26.

Asked what will drive industry growth in general this year, he replied: "The continuing interest around mobile apps on smartphones and tablets deepens. That trend will create a lot of opportunity" to equip police, military and citizens with smart mobile security devices.

Home Security Makeover

Also making up a big piece of the security and safety group are security systems companies like ADT (ADT) and service companies such as Brink's (BCO), known for its armored-car delivery service.

ADT is the largest company in the group, with market capitalization of $5.7 billion and annual revenue north of $3.3 billion. The leader in the U.S. home-security market, currently with about 25% market share, the 140-year-old company was bought by diversified manufacturer Tyco International (TYC) in 1997, then spun off in September 2012.

CEO Naren Gursahaney says there's lots of room for growth.

"Only 19% of homes in the U.S. and Canada have a monitored security system, and the home automation industry is still in its infancy," Gursahaney told analysts on a Jan. 30 earnings call.

ADT has tough competition as communications giants AT&T (T) and Comcast (CMCSA) ramp up security offerings. AT&T's Digital Life, for example, lets users remotely control home-security systems .

ADT might also feel some competition from diversifying Brink's. Its earnings per share over the last three quarters rose from 0% to 26% to 36% last quarter. Consensus is for a 46% hike in EPS this quarter.

CEO Tom Schievelbein told IBD in an email interview that after diversifying globally — 77% of 2013 revenue came from international markets — Brink's is moving into adjacent industries such as prepaid credit cards and payment processing.

He also noted the company is "exploring a potential re-entry into the residential security market," which Brink's exited in 2008.

Smarter Guns, Manufacturing

In the firearms market, technology presents both opportunity and controversy for Smith & Wesson, Sturm Ruger and others.

"A hot topic and trend that has been popping up is increased interest in smart guns," IBISWorld analyst Maksim Soshkin said. Smart guns, which are expected to hit the market later this year, will use technology such as fingerprint ID chips to recognize the user and shoot only when used by the proper person.

When they come to market, that might trigger a New Jersey law that mandates all state dealers only sell smart guns, Soshkin said. More than a decade ago, New Jersey passed a law that within three years after the technology becomes available, all guns in the state must be smart guns.

On the manufacturing side, "3D printing has the potential to change the way guns are manufactured," Soshkin said. A company called Solid Concepts, for example, made a metal Browning handgun with a 3-dimensional printer, which uses a software "blueprint" to make devices.

Follow James DeTar on Twitter: @IBD_JDeTar.

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