Sturm Ruger: Strong Brand, Weak Industry

Sturm Ruger & Company Inc’s RGR “well-known Ruger brand enjoys considerable brand equity, having been the top selling brand of firearms in the U.S. market in the past decade, with a top 3 presence in each of the rifle, pistol, and revolver categories.”

Wunderlich’s Rommel Dionisio initiated coverage of the company with a Hold rating and $51 price target.

Cyclical Downturn

The analyst pointed out, however, that the firearms market was at present facing multiple near term challenges, including a cyclical downturn in demand, along with excess retailer inventories of rifles and various competing product introductions.

“We recommend investors remain on the sidelines until greater visibility behind ap firearms market recovery becomes more evident,” Dionisio stated.

The analyst mentioned the Ruger brand has long been a best selling one for firearms in the U.S. market, ranking among the top three in each of its categories, pistol, rifle and revolver.

“As such, Sturm Ruger enjoys strong relationships with its independent distributors, along with significant economies of scale with regard to product design, manufacturing, marketing, and distribution,” Dionisio noted.

Related Link: Gun Sales Dip In January

Strong Track Record

Pointing to the robust track record Sturm Ruger has of operational management, the analyst stated that during times of solid consumer demand, the company has consistently generated operating margins of more than 20 percent, usually exceeding profit margins among its major publicly traded as well as privately held peers in the firearms industry.

“Sturm Ruger’s experienced management team has certainly demonstrated a strong track record of operating and manufacturing efficiency, consistent and predictable pricing and promotional strategy, and strict attention to cost control,” the analyst said.

Stock Valuation

However, given that the U.S. firearms industry is currently undergoing a cyclical downturn, as compared to other leisure/recreational categories, which are seeing overall positive sales trends, Dionisio believes Sturm Ruger shares warrant an approximately 20 percent discounted valuation to the peer group average.