The three largest publicly traded firearm manufacturers had a dismal year in 2016.
Sturm, Ruger & Co. (RGR, Financial), Smith & Wesson Holding Corp. (now American Outdoor Brands Corp. [AOBC]) and Vista Outdoor Inc. (VSTO, Financial) all significantly underperformed the Standard & Poor's 500, ending the year down 9.16%, 4.09% and 17.10%. With an already weak demand outlook hanging over the market for U.S. firearms, the election of Donald Trump was the nail in the coffin for 2016 returns.
Gun sales and declining growth prospects
In 2007, the FBI processed 11 million firearms background checks. In 2016, the FBI processed 27 million background checks. Except for 2014, this figure has grown year over year continuously since President Barack Obama entered the White House. Gun enthusiasts have called Obama the “greatest gun salesman in the history of the world.” This statement is clearly hyperbole, but it does underscore the demand his historic election brought to the U.S. firearms market.
Fear and greed are two of the most powerful motivators in any market, and fear has been driving gun sales through the roof for nearly a decade.
This is all about to change.
On Friday Trump will be sworn in as the president of the U.S. and will have a Republican controlled House and Senate through 2019. From a demand perspective, we are likely to see gun sales – and therefore top-line revenue – decline for American Outdoor Brands, Sturm Ruger and Vista Outdoor. While background checks do not perfectly match gun sales, they are the best predictors of aggregate demand. The monthly update from the National Instant Criminal Background Check System (NICS) can be found here.
Watch this closely in the in the coming months if U.S. firearm manufacturers make up a portion of your portfolio.
Legislative action that could turn the tide
With declining demand on the horizon, the firearms industry (in conjunction with the gun lobby in Washington) is getting creative.
On Monday House Republicans introduced legislation that would significantly deregulate the sale and possession of firearm suppressors and silencers. These silencers are the metal tubes that affix to the end of firearms, significantly reducing the weapons sound and muzzle flash. You've probably seen one in a James Bond film. Since 1934, these devices have been considered “Title II” firearm components under the National Firearms Act. With this designation comes a significant application process and a $200 tax stamp before purchase.
The new legislation titled the “Hearing Protection Act” would greatly simplify the process of buying and owning a suppressor. The legislation is explained as a means for sport shooters to protect their hearing, but a secondary benefit for the industry would be a second (or third or fourth) income stream for manufacturers.
Looking forward
For now, firearm manufacturers continue to be a sell based on the long-term demand prospects and some these firms'Ă‚ inability to monetize recent acquisitions. With this said, these stocks have taken a beating since the election and a change in rhetoric out of Washington or significant legislation that can spur demand should be viewed as buying opportunities.
Disclaimer: I hold not positions referenced in this article.
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