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Out of ammo

10 December 2013 By Robert Cyran

Fading reform hopes should take the shares of gunmakers with them.

Such a turn of events would reverse an extraordinary run for the industry. The U.S. government collected $6 billion of excise taxes on gun and ammunition purchases in 2012, more than twice the typical amount in the years to 2007. This year is on pace to generate the biggest sum ever. The number of federal background checks, a good indicator of future gun purchases, also should easily exceed 20 million in 2013, a record.

Last year’s massacre at an elementary school in Newtown, Connecticut created a broad perception that tighter gun laws were coming. The week following the tragedy spurred close to 1 million background checks. Other factors have been brewing for longer.

Smith & Wesson’s order backlog increased more than 10-fold in the six months following Barack Obama’s 2008 election victory. Doomsayers also worried the financial crisis had set the stage for a societal collapse, sending sales of “tactical weapons” like the AR-15 used at Sandy Hook up even more sharply.

The percentage of households owning firearms has declined slowly over the past three decades. Current demand, therefore, looks borrowed from the future, especially considering the durability of guns, 300 million of which already exist in the United States.

Moreover, institutional investors like public pension funds face increasing pressure to divest holdings in such manufacturers. The decision by private equity firm Cerberus Capital to let investors exit Freedom Group, the maker of Bushmaster rifles, is a case in point.

Over the past two years, Sturm, Ruger shares have more than doubled. Smith & Wesson’s have more than tripled. If Sturm, Ruger’s $650 million in revenue reverted to its pre-Obama, pre-crisis 2006 level, about three-quarters of it, and a bigger proportion of net income, would be erased. The shares, in that scenario, would look absurdly overvalued at over 100 times earnings.

Some investors are already pretty worried. Nearly a third of the shares of Sturm, Ruger and Smith & Wesson have been sold short. Significant gun law reforms don’t look promising now, and neither do the financial prospects of gunsmiths.


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