By Arpita Mukherjee and Siddharth Cavale
U.S. gun makers are aiming for record quarterly sales as first-time buyers, including a growing number of women and pensioners, rush to buy weapons before anticipated gun-control laws come into force.
President Barack Obama’s proposals to curb gun violence in the United States, including enhanced background checks and a ban on military-style assault weapons, have increased political and investor scrutiny on gun companies accustomed to growth.
But Smith & Wesson Corp and Sturm Ruger Inc , which will report quarterly results within the next two weeks, brushed off negative sentiment after the Newtown, Connecticut school shootings on Dec. 14. Shares recovered and sales never stopped.
"The firearms industry is certainly seeing explosive sales growth in the last several months,” Wedbush Securities analyst Rommel Dionisio told Reuters.
Background checks for firearm sales, mandatory for all purchases made at U.S. gun stores, rose nearly 50 percent year-on-year in December, data from the FBI's National Instant Criminal Background Check System showed.
This was the highest monthly percentage rise ever reported for a measurement commonly used to gauge the firearm industry’s performance. It eclipsed the 30.8 percent rise of November 2012.
Brant Williams, owner of Frontier Firearms LLC, said sales at his gun store in Kingston, Tennessee rose about 25 percent after Obama’s re-election. The spike was even greater after the president spoke at a memorial service for the Newtown victims.
"From (the memorial speech) until about the week of Jan. 21, we probably saw a 100 percent increase,” Williams told Reuters.
Several gun store owners said the AR-15 assault rifle - the firearm used in the Newtown shootings - was largely responsible for the initial surge in sales. Customers feared the weapon would be banned, they said.
After the rush, supply soon dwindled. But customers simply switched to other firearms, said Bryce Curry, chief executive of Brownsburg, Indiana-based Premier Arms LLC.
"We’ve had our best ever two months,” he said. "Sales, percentage wise, from December 2012 to January 2013 have risen 500 percent.”
ASSAULT WEAPONS POPULAR
In the four days after the Newton shootings, Sturm Ruger’s shares fell 15 percent to a six-month low. The stock has recovered those losses and closed on Feb. 22 at $53.67, up more than 12 percent since Obama laid out gun control plans on Jan. 16.
Smith & Wesson’s shares fell more than 18 percent after Newtown, but now trade nearly 20 percent above the four-month low they hit in December. They closed at $9.18 on Feb. 22.
Brian Rafn, managing partner at Morgan Dempsey and lead portfolio manager of its 'Small, Micro-Cap Value' fund, said his company had owned Sturm Ruger stock since 1992. The gun maker is now its biggest holding.
"Our estimates for U.S. (gun) production plus imports for 2012 are 14 million to 18 million units,” he said. For 2013, his forecast was 19 million to 20 million units.
Combined sales of assault rifles and semi-automatic hand guns, which once comprised about 40 percent of total gun sales, now contribute about 75 percent, said Philip Mincey, an employee at DCM Consulting and Firearms in Longs, South Carolina.
"We have probably sold more in the last couple of months than we have in the whole of last year,” Mincey said, adding that sales at DCM had risen 75 percent since the U.S. elections.
This bodes well for Sturm Ruger, which will report fourth-quarter results on Wednesday, and for Smith & Wesson, which is expected to report on its third quarter early next month.
Wall Street expects Smith & Wesson to report revenue of $133.7 million, a 36 percent rise over the same period a year ago. Sturm Ruger’s quarterly revenue is forecast to grow 30 percent to $121.5 million.
Such growth, however, would lag the 48 percent rise that Smith & Wesson posted in its previous quarter. Sturm Ruger, in its most recent reporting period, boosted revenue by 47 percent.
DOUBTS OVER SUSTAINABILITY
This begs a question for gun makers: how long can the boom last? Some investors have already had enough.
A few days after the Newtown massacre, private equity firm Cerberus Capital Management sold gun maker Freedom Group, whose Bushmaster AR-15 rifle was used in the school shootings, after pressure from the California State Teachers' Retirement System.
This month, New York City’s teacher pension fund and California Public Employees' Retirement System, best known as Calpers, sold their investments in several gun makers.
Yet, the gun-manufacturing industry is struggling to keep up with demand. Supplies of ammunition, long guns and especially the semi-automatic rifles have dried up.
"For every one firearm that I can sell, I have five missed sales because of low stock,” Curry said.
Sturm Ruger, which can produce up to 425,000 guns every quarter from its two factories in Newport, New Hampshire and Prescott, Arizona, has outsourced production and built smaller plants to aid production.
Other industry watchers think demand is not sustainable.
"Even in the wake of extremely robust consumer demand, we are skeptical on how much earnings upside can be captured,” said Scott Hamann, analyst at Keybanc Capital Markets Inc.
Perhaps most telling is the fact that Southpoint Capital, the 11th-largest shareholder of Sturm Ruger, believes the stock price will fall.
"We don’t think the earnings are sustainable,” said Southpoint Chief Financial Officer Anthony Buffalano. (Editing by Robin Paxton) - Reuters