Good news for some American gun makers...


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Drizzt
July 21, 2005, 09:42 PM
Get Forearmed on Two Gun Makers

By Jon D. Markman
RealMoney.com Contributor
7/21/2005 7:03 AM EDT


With Harley-Davidson backfiring and Coca-Cola in the can, the past year hasn't been the greatest for famous American consumer brands associated with the great outdoors and sunny summer months.

But two U.S. icons have started the season off with a bang. Both are small-caps: Smith & Wesson, maker of the nation's most popular line of revolvers, and Sturm, Ruger & Co., maker of the nation's most popular line of pistols.

There are a number of structural, legal and specific reasons why shares of the country's only two public firearms manufacturers are blazin'.

Let's start with Smith & Wesson, probably most famous as the original manufacturer of the powerful .357 Magnum pistol. This is a company that has had more owners over the past 150 years than your basic Saturday night special, but its latest group of executives appears to finally have it on track. Founded in 1852 by Horace Smith and Daniel Wesson, it passed through any number of hands, including earlier incarnations of the auto-parts makers Lear and Tomkins, before merging with a small public outfit called Saf-T-Hammer in 2001.

Shares kicked around the $1 level for a while, then spent three years at around $2 to $2.50 before shooting up to the $4.50 zone in the past three months. The stock went up 13% right after the terror attacks in London. Smith & Wesson's new leaders have expanded its focus from its niche in consumer handguns under the Smith & Wesson and Walther brands -- 80%-plus of current sales -- to take aim at more commercial opportunities in the $2 billion market for U.S. firearms. It has also indicated it will launch a long-gun division -- the industry term for rifles and shotguns. These would be the first with the Smith & Wesson label.

Market Dominated by Europeans
Until now, three foreign companies have, strangely enough, dominated sales of high-end firearms to U.S. law enforcement officers and the military: Glock of Austria, Beretta of Italy and Sigarms of Switzerland. On July 14, Smith & Wesson continued its move to break their stranglehold on the domestic market by announcing it had hired two former Glock sales leaders into its top law enforcement sales posts.

Two weeks ago, the company announced it had hired a former top official of a major Beretta division to head up its effort to enter the long-gun market. S&W is already the largest U.S. maker of handcuffs, so it already has salespeople talking to law enforcement agencies.

It should do well in its new fields. Recent industry surveys have shown that buyers consider Smith & Wesson their No. 1 choice, even in product areas in which it does not now participate, such as shotguns and ammunition. Eric Wold, an analyst at the San Francisco-based brokerage Merriman Curhan Ford, said the company may also diversify into the "less-than-lethal" niche -- the province of pepper spray, stun guns and beanbag guns.

Wold is the only analyst with published earnings estimates. Without including anything but forecasts for the consumer handgun division, he sees the potential for Smith & Wesson to earn 16 cents per share in fiscal 2005 and 21 cents in 2006. If you put a 25-times multiple on 2006 earnings, you get $5.25, or more than 16% above its current perch at $4.51. If you think that its efforts to push more powerfully into the law enforcement and long-gun markets will be successful, you could estimate the company might earn 30 cents a share or more in 2007.

The sooner the company makes the break toward a wider sales opportunity, the better. According to numbers assembled by Wold from federal sources, the rate of growth of the $460-million-a-year handgun market has slowed down to a 3.6% clip. That's not enough for Smith & Wesson to maintain its current share price. To gain more new users, the company has used some of its cash hoard to innovate. It has done well with a .50-caliber Magnum, dubbed the Model 500, which reportedly has three times the muzzle energy of a .44-caliber Magnum round. (The Model 500, whose barrel is more than eight inches long, is mostly marketed to hunters.)

Wold reports that the gun generated 8% of total revenue in its first full year of sales and doubled sales in the most recent 12-month period, to 21,700 units. He said S&W introduced 14 new products at the year's big trade show in Las Vegas -- much more than its competitors.

On the law enforcement side, Smith & Wesson apparently does well as a backup firearm, though it has struggled so far in its quest to become officers' primary weapon. There's a big marketplace out there. Federal statistics indicate there are nearly 710,000 sworn officers at nearly 18,000 agencies around the country. According to Wold, 65% of recent New York Police Academy recruits chose S&W side arms after graduation. However, contracts with agencies come up for renewal only every five to six years, so it is not an easy market to crack.

The Military Market
As for the military, the company recently won its first federal contract in 15 years -- a $1.2 million deal to supply 4,750 semiautomatic pistols to the U.S. Army Security Assistance Command, which shipped them to the Afghanistan National Army. Wold notes that with a better lobbying effort in Washington, the company would have been eligible for major deals recently won by foreign competitors, including a $19 million contract to supply 50,000 side arms to the Coalition Provisional Authority in Iraq (that contract was won by Glock); a $24-million contract to supply 65,000 pistols to the U.S. Department of Homeland Security (won by Sigarms); a $4.2 million contract to supply pistols to the U.S. Coast Guard (won by Sigarms); and a contract to supply 18,744 pistols to the U.S. Air Force (won by Beretta).

S&W's effort picked up some firepower last month when the Department of Homeland Security's budget was approved with an amendment that requires federal agencies to buy products made from at least 50% U.S. goods and labor. And its licensing and marketing efforts are beginning to look brighter. It has shed a previously unfocused strategy to bear down on the sort of consumers who have made Nascar the most popular sport in America; it has sponsored a SKI Motorsports-owned Chevrolet on the Busch Series tour, No. 30 on your scorecard, and sells branded merchandise at races.

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Drizzt
July 21, 2005, 09:45 PM
Sturm, Ruger: Simpler Story
Trading at a market cap of nearly $240 million, Sturm, Ruger -- run by the 65-year-old son of co-founder William Ruger -- earned $4.1 million over the past 12 months on revenue of $149 million. Shares have fallen 21% in the past year. But amid recent signs of stronger sales of its pistols, rifles, shotguns and precision titanium castings, they're up 35% in the past three months from their May low. The company's balance sheet is a thing of beauty, with $35 million in cash and no debt -- and, remarkably, it pays a 40-cent dividend that provides a 4.6% yield.

Like Smith & Wesson, Sturm, Ruger has positive brand recognition and loyalty among hunters and military buffs. The company is seeking to capitalize on it this year by releasing a dozen new products.

And both may come to have a takeover premium. The firearms industry has more than 160 small manufacturers, virtually all private. Thus, it's ripe for some consolidation eventually.

Richard Cuniff, a highly regarded value investor (and a Warren Buffett brother-in-arms), is a board member who bought 20,000 Sturm, Ruger shares at $8.60, or right around the current price, a year ago after shares were killed in the wake of a dividend cut. He bought another 20,000 shares two months ago in the mid-$6s.

And if you believe, as C.L. King analyst Jim Barrett does, that the company will earn 50 cents a share in 2006, up 25% from full-year 2005 estimates of 40 cents, then the forward price-earnings multiple of 17 looks very reasonable. If you put a 20-times multiple on potential 2007 earnings of 60 cents, you can see the potential for $12 shares in the next 18 months, which would give you about a 50% total return in combination with the big dividend.

Lawsuits Fading Away
One reason that prospects are brightening for this pair is that their legal exposure is fading. Barrett noted that lawsuits against gun makers by local governments have repeatedly been dismissed by courts, and laws in 34 states prohibit any action at all. On the federal level, a bill called the Protection of Lawful Commerce in Arms Act -- which would bar future civil action by municipalities -- has been passed by the House but is blocked in the Senate.

Either way, it looks like investors in these two gun makers could shoot the lights out over the next couple of years as long as they exercise a little patience with volatility along the way.

http://www.thestreet.com/_googlen/funds/supermodels/10233599.html?cm_ven=GOOGLEN&cm_cat=FREE&cm_ite=NA

I know, it's not the normal sort of news, but there were a few interesting nuggets hidden away in the story, and if investors are being told that these are good stocks to invest in, that should mean more capital for development and more visibility as a mainstream industry.

MAUSER88
July 22, 2005, 10:59 AM
I like to read good news like that!

armoredman
July 22, 2005, 11:28 AM
The Lawful Commerce In Arms Act has 55 cosponsors - how can it be blocked in the Senate? I never heard it passed the House...anyone else?

Mr. James
July 22, 2005, 01:14 PM
It can be blocked in the Senate just as it was last year. Feinstein and the Manchurian Candidate can offer amendments to re-authorize (and expand) the semi-automatic rifle ban and to "close the gun-show loophole." At that point, the bill's original sponsors will vote against it.

Of course, there are more 'pugs in this Senate, so the Feinstein and McCain amendments may not survive. They passed by 52-47 and 53-46 votes, respectively, last year.

countertop
July 22, 2005, 01:34 PM
It can be blocked in the Senate just as it was last year. Feinstein and the Manchurian Candidate can offer amendments to re-authorize (and expand) the semi-automatic rifle ban and to "close the gun-show loophole." At that point, the bill's original sponsors will vote against it.

Its mmoving early next week. We'll see what happens, but I expect there will be some attempt to attach stuff to it. Rumor still is that rather lame .50 Cal gun show ban language (you can only purchase them through an FFL, no private sales without a background check) will be attached as a compromise in exchange for dropping the effort to attach AWB and the Gun Show stuff.

That way Feinstein can say she got something - even though in reality she got nothing. Its the way the system works.

simon
July 22, 2005, 01:40 PM
Feinstein Gun Ban Could Come up in the Senate Soon

Gun Owners of America E-Mail Alert
8001 Forbes Place, Suite 102, Springfield, VA 22151
Phone: 703-321-8585 / FAX: 703-321-8408
http://www.gunowners.org

Thursday, July 21, 2005

While the big news of the day is President Bush's pick for the Supreme Court (more on this below), Gun Owners of America is hearing rumblings that the Senate will soon be considering legislation to slow down the number of frivolous lawsuits against gun makers.

Although GOA is supportive of this legislation, S. 397, we must remember that anti-gun Senators used this legislation last year to load it up with all kinds of anti-gun riders -- things like gun show restrictions, semi-auto bans and more.

In the end, pro-gun supporters were forced to vote against (and kill) the lawsuit protection bill in order to defeat the anti-gun amendments.

GOA told Majority Leader Bill Frist that all of this could have been avoided if he used certain parliamentary maneuvers to keep Senator Dianne Feinstein from offering her gun ban amendment to the bill.
Later, when she tried to attach the semi-auto ban to another bill, GOA asked you to contact Frist and urge him to use those parliamentary procedures.

Well, he did. And it worked. Feinstein & Co. were furious that Frist was acting in such an "undemocratic" fashion. They railed against Frist and the Republican leadership. But we escaped without getting ANY new gun restrictions. (You can read about this victory by going to http://www.gunowners.org/a091404.htm on the GOA website.)

Fast forward one year. Some Republicans have seemingly forgotten this key success from last year, and seem willing to allow Sen.
Feinstein to offer gun control legislation to the gun makers'
protection act.

The Washington Post reported last week that Sen. Feinstein is looking to offer a gun ban when the lawsuit protection bill comes up for a vote in the next couple of weeks. Feinstein said she "would try to limit sales of powerful 50 caliber weapons so that they could only be sold through federally licensed dealers, not at gun shows."

Unfortunately, rather than repeating a proven strategy for success, Senate Republicans are reportedly adopting a VERY DANGEROUS plan. In fact, they would be going down the same road that gave us both the semi-auto ban and the McCain-Feingold incumbent protection act.

The Post quotes Senator Larry Craig (R-ID) as saying that the "strategy this time would not be to dump the bill but remove anything objectionable in conference with the House of Representatives."

OK, there are two problems with this strategy. First, they don't need to "dump" the bill. Why not just use the parliamentary procedures (described at http://www.gunowners.org/a030204a.htm on the GOA website) which would prevent -- and have prevented in the past -- anti-gun amendments from even being offered in the first place?

Second, it's very dangerous to ask Senators to vote for gun control legislation, on the promise that it will be killed later on. You wouldn't try this approach out in the woods. When is the best time to kill a poisonous snake? Answer: the first chance you get. The longer you let it live, the better chance it has to bite you.

This is exactly what happened in 2002, when many senators voted for the McCain-Feingold restrictions on free speech, based on the assumption that the conference committee would clean up the bill later and the Supreme Court would overturn it.

Gun owners are now well aware that the conference committee never cleaned up the McCain-Feingold incumbent protection bill, and draconian restrictions on the ability of Gun Owners to inform people of their legislators' anti-gun records went to the President's desk.

President Bush then signed the bill, also relying on the presumption that the Supreme Court would strike down unconstitutional provisions that were in it.

Well, wrong again. The Supreme Court upheld the restrictions in December, 2003.

This is also the SAME FAILED STRATEGY that gave us the semi-auto ban.
Pro-gun Senators refused to filibuster the semi-auto ban -- when Senator Feinstein offered it as an amendment to the crime bill in November of 1993 -- arguing that they would remove the language in conference! Sound familiar?

The ban survived the conference committee and was happily signed into law by President Clinton. Were it not for the sunset provision, the semi-auto ban would still be the law of the land.

Remember, you always kill a poisonous snake the first chance you get.
One can only assume that a conference committee will "take care of the problem" if one ignores the determination of Ted Kennedy, Dianne Feinstein and Chuck Schumer.

ACTION: Please urge Senator Bill Frist to do whatever it takes to keep anti-gun amendments off of the gun makers' protection act. Ask him to use ANY and ALL of the parliamentary maneuvers that he has at his disposal to keep Dianne Feinstein from attaching her gun ban to S. 397. Urge him to use the power of the majority to stand for the Bill of Rights.

You can call Senator Frist at (202) 224-3344, or go to http://www.frist.senate.gov and select "Contact Senator Frist" under the "About Senator Frist" heading to send a message similar to the one below.

Please note: Even if you do not live in Tennessee, Sen. Frist will probably appreciate your opinion since he is looking to represent you in the future as the next President of the United States.

Nathanael_Greene
July 22, 2005, 04:24 PM
"This is a company that has had more owners over the past 150 years than your basic Saturday night special..."

Very funny.

sumpnz
July 22, 2005, 05:05 PM
Well, if Feinstein really wants the .50BMG limited to FFL sales only, what say we let her have that on the condition that the 1986 Hughes ammentment (the one that closed the registry for new civilian machine guns) gets repealed.

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