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Sturm, Ruger May Show Surprising Firepower in Q1

Rich Duprey, The Motley Fool

Sturm, Ruger (NYSE: RGR) is under the gun as the firearms industry remains in a slump and activist investors target its board of directors.

FBI background checks on potential gun buyers are down almost 4% year to date. Meanwhile, figures by the National Shooting Sports Foundation adjusted to exclude checks of existing permit holders to give a more accurate view of market demand shows background checks are down 8.5% in 2019.

Man shooting handgun at target

Image source: Getty Images.

And activist investors want shareholders to withhold their votes from Ruger chairman Marc Jacobi and director Sandra Froman because they didn't like the findings of the report the gunmaker issued on the risks the company faces from gun violence. Froman is a target because she also serves as a director of the National Rifle Association. 

As Sturm, Ruger heads into its first-quarter earnings report on Tuesday, May 7, let's take a look at what investors might expect and whether it will be as tumultuous as things seem.

Selling into a soft market

A year ago, first-quarter net sales dropped 5% as adjusted background checks fell 6%. With first-quarter checks down appreciably more this year, we might expect to see Ruger's sales falling more steeply than they did in 2018. Although its earnings rose to $0.69 per share last year, it also benefited from tax reform, which helped offset what would have been a lower profit picture.

There is reason to believe, however, that Ruger's first quarter might not be so bad. While it won't have tax reform or a less bad sales picture, the tragic Parkland school shooting on Feb. 14, 2018, caused a big spike in gun purchases, which affected the background check numbers. But Ruger doesn't sell to the general public, only to federally licensed firearms dealers, so the movements of the market don't always neatly reflect what's occurring at the gunmaker.

Not that the sales won't be soft, but they might not be nearly as bad as expected considering the state of the industry as a whole, and more inventory would be needed to replace guns that were bought in a panic. 

A more granular look is needed

What really helps keep Ruger going, though, are new product introductions, which represented 30% of firearms sales in 2018. The gunmaker says it plans on spending as much as $25 million this year on capital expenditures, or more than twice the $10.5 million it spent last year, with most of it going to new product development.

President and CEO Chris Killoy also reminded analysts on Ruger's fourth-quarter earnings conference call that it's important to not just look at the overall market, but also at niche segments, too, because comparatively speaking, the market is still strong versus a few years ago, and that's especially true in certain categories. He called out precision rifles and pistol caliber carbines as two segments that are performing well and were among Ruger's new product introductions last year.

Ruger's carbine also happened to be one of the best-selling guns last year, showing up on GunBroker.com's top semiautomatic rifle list more times than any other rifle. The uniqueness of the firearm is that it accepts both rifle and pistol magazines, making them a versatile choice for many gun buyers.

That popularity has made them an expensive option, though, with price tags often over $1,000, but Ruger's version sells well below that amount. And because it is disassembled just like Ruger's 10/22 rifle -- the all-time most popular rifle on the market -- there's a familiarity to it that owners like.

Taking on activists

The move to censure directors, however, might not get much traction as corporate governance heavyweights Institutional Shareholder Services and Glass Lewis are split on censuring Ruger's directors. Where ISS recommends withholding support from Jacobi and the directors who chair the gunmaker's governance and risk oversight committees (but endorses Froman), Glass Lewis backs all of the directors.

Both outfits had endorsed the shareholder resolution making Ruger create the risk report, but it seems ISS agrees with the activist investors the gunmaker is not fully appreciating the risks to its reputation. Still, because this will be something addressed at Ruger's annual shareholder meeting it won't affect quarterly earnings, though it might be mentioned.

Key takeaway

It's likely that Sturm, Ruger's first-quarter earnings report won't be shooting out any lights, but investors might be surprised the leading firearms manufacturer is still on target for growth.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.