Why Gun Stocks Plunged in August

[The Legion]

https://www.fool.com/investing/2017/09/06/why-gun-stocks-plunged-in-august.aspx

Without the threat of gun regulation, gun companies are finding it harder to sell guns.

Sep 6, 2017 at 8:35AM

Gun stocks dropped like a rock across the board in August. Sturm, Ruger & Company Inc (NYSE:RGR), American Outdoor Brands Corp (NASDAQ:AOBC), and Vista Outdoor Inc (NYSE:VSTO) all dropped double digits, according to data provided by S&P Global Market Intelligence, as a wave of bad news hit the industry. 

The domestic gun industry is actually suffering from operating conditions that are too favorable, which sounds a little crazy on the surface. But when you dive into the numbers it's entirely predictable that gun stocks are having a terrible 2017. 

What happened in August

The drop in gun stocks last month was largely due to confirmation that people aren't buying as many guns as they were a year ago. Sturm, Ruger & Company's sales fell 22% to $131.9 million in the second quarter of 2017 and net income fell 53% to $10.2 million. Vista Outdoor's fiscal first quarter sales for the quarter ended July 2, 2017, fell 9.8% to $568.7 million and net income dropped 42.8% to $16.7 million. American Outdoor reported a 3.6% increase in sales for the fiscal fourth quarter ended April 30, 2017, the most recent data available, but that included the acquisition of Taylor Brands, Crimson Trace, and UST Brands in the past year. 

The macro data reinforces the decline in sales as well. Purchases run through the National Instant Criminal Background Check System dropped from 2.2 million in July 2016 to 1.7 million in July 2017. There's little urgency to acquire a gun with President Trump in the White House and Republicans controlling Congress, so sales will naturally drop. 

The irony of gun stocks

What's odd about gun companies is that the drop in sales in 2017 was easily predictable. There's typically a surge in gun sales when either a Democratic presidential candidate wins office or when there's a mass shooting. It's sad but true that the threat of restrictions is really what drives gun sales in the U.S. 

The fact that Republicans will control both the White House and Congress for the next 18 months and the executive branch until 2021 puts significantly less urgency on gun purchases. And with a favorable policy environment for the next few years, it's unlikely sales will spike soon. 

What to do with gun stocks now

A decline in gun sales will certainly take a bite out of earnings as manufacturing and operating costs are spread over fewer sales. For now, gun makers aren't expecting the tough operating condition to result in net losses in the foreseeable future, indicated by guidance for the next few quarters. 

What investors will want to keep an eye on is the long-term sales trend. If revenue continues to drop double digits it will be harder and harder to stay profitable, even if the policy environment for gun makers appears to be favorable. It's ironic, but the worst thing that can happen to gun stocks is a government that's in favor of gun ownership, which investors are seeing very clearly in 2017.

 

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[Chucktshoes]

I don't think this is a surprise to anyone. At least it shouldn't be. 

[DaveTN]

I’m sure sales are less than during the threat years, but I think they are probably okay. Prices on new are dropping at the retail level, so the manufacturers should be getting a lot of the sales that would usually be in the used market. The only thing I see moving in the used market is the collectables or those that have a truly used price.

[gregintenn]

Back to normal would be a more appropriate way to describe today's gun industry.

[Sam1]

After seeing the fluctuation over the past few years, I'll definitely be playing with gun stocks around election time from now on.

 

[Obiwan]

That's normal. They are collapsible stocks.

[shotgunshooter]

That's why I prefer fixed stocks

Sent from my XT1585 using Tapatalk

[MP5_Rizzo]

9 hours ago, Sam1 said:

I'll definitely be playing with gun stocks around election time from now on.

Why wait until election time?  I try to handle gun stocks daily along with the actions and barrels. 

Seriously though, if anyone one here has any investments in Black Rock, Vanguard or Fidelity mutual funds and depending on the fund family they very well may be invested in firearm or ammunition industry.

[Sam1]

my MFs are left alone - in for the long haul.  I'm looking to just do some short term flips.

[SonnyCrockett]

stocks always dip in Aug...