Backfire

18 November 2014 By Rob Cox

Two days after the U.S. midterm elections on Nov. 4, National Rifle Association Chief Executive Wayne LaPierre crowed about the success his group achieved in helping Republicans take control of the Senate and getting pro-gun candidates elected nationwide, effectively putting a bullet in legislative attempts to enact new federal controls on firearms.

“Gun owners all over this country … I mean it was just amazing what they did on election night,” LaPierre said in a video posted on the NRA’s website. “They beat President Obama – they stopped him dead in his tracks in his attempt to take away our freedom.”

Yet all is far from hunky-dory in the consumer arms business. Colt Defense, the maker of the gun that won the West, just scrambled together a new loan after last week warning of a possible default. Moody’s Investors Service recently downgraded the debt of Remington’s parent. And Sturm Ruger and Smith & Wesson have taken a beating in the stock market. Good news for guns, it seems, is bad news for gunmakers.

Their problem is that weapon sales are driven by fear. Years of stocking up by Americans worried first about their safety in the wake of the 9/11 attacks, then about economic security and finally about the enactment of laws that might curtail their firearms ownership boosted the business. Now, though, there’s a gun glut – and the beginnings of an industry shakeout that’s going to hurt investors.

The tip of the bayonet, so to speak, was Colt Defense’s announcement last Wednesday that was in danger of breaching loan covenants, which might have meant missing a $10.9 million interest payment on its $308 million debt pile that was due on Monday. At the 11th hour the company secured new financing, but a crunch has probably only been deferred.

A default would not just be bad news for Colt’s owner, private equity firm Sciens Capital Management. It would also mark an ignominious turn for the Hartford-based company named for Sam Colt, whose 1836 patent for a firearm equipped with a revolving cylinder containing up to six bullets helped the U.S. army defeat Indian forces and conquer the Western frontier.

Colt is not alone. Freedom Group, controlled by buyout firm Cerberus Capital, a few weeks ago saw its debt ratings cut by Moody’s, which cited “continued pressure on revenue and EBITDA for the remainder of 2014.” Freedom’s best-known brand, Remington, predates Colt by two decades.

Both manufacturers diversified from their traditional offerings of shotguns, rifles and handguns into AR-15-style semiautomatic weapons after a law that banned them was allowed by Congress to expire in 2004. At an average price of over $1,000, with dozens of accessories available to customize each gun, these modern sporting rifles have powered industry growth.

After the Sandy Hook school shooter used an AR-15 made by Freedom Group’s Bushmaster division to kill 20 first-graders and six teachers almost two years ago, sales soared further as legislators re-introduced a version of the previous assault weapon ban. That failed, as did the Manchin-Toomey Act, a bipartisan Senate bill to require background checks for all gun purchasers.

But the stockpiling continued, partly because Manchin-Toomey lost by just a handful of votes and Harry Reid, the Senate majority leader, could have resuscitated the bill. With the Republican takeover of the Senate, that threat is now off the table.

That’s a problem for Sturm Ruger and other manufacturers sitting on unsold weapons. The Southport, Connecticut-based gunsmith reported that inventories as of the end of September had more than doubled to $48 million from the same quarter a year earlier. It also reported quarterly sales almost halved, and net income plunged 76 percent.

Ruger shares surged 10-fold from before Obama’s victory in 2008 through the start of this year, but the company’s worth has halved from its January peak to about $730 million. The stock price of rival Smith & Wesson has tumbled by a quarter this year.

The downturn will come as no surprise to Carlo Ferlito, general manager of Italy’s Beretta, which has been making weapons for 500 years. At the museum in its headquarters near Brescia, Beretta displays a 1526 bill of sale for 185 arquebus barrels to the Arsenal of Venice for 296 ducats. When I visited Ferlito last year, he called the spike in tactical arms sales a fad reflective of two basic fears: the passage of gun control legislation and economic decline.

These fears have now receded, leaving the gun business without a catalyst. Well, almost. There’s still the NRA’s LaPierre. In the video claiming midterm victory, he warned his association’s members that “if we end up with an anti-Second Amendment president in 2016, all our freedoms since the founding of the country could be in jeopardy. We are going to have the fight of our lives.”

 

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