Gun Stock Earnings 5 Takeaways: Sturm, Ruger & Company (RGR), Olin Corporation (OLN), Smith & Wesson Holding Corporation (SWHC)

Bubble demand

In the Motley Fool video, “Sturm, Ruger & Co. Earnings: Is the Arms Race Over”, Fool analyst Blake Bos believes that the current sales trajectory in the industry reside at “unsustainable” levels. I agree with him. Once the fears over outright government oppression and crime rates subside a little, the demand will ease up along with the stock prices in the short term. Further evidence reside in the 28% increase of law enforcement sales in Olin’s Winchester unit in its most recent quarter.

Deleveraging

Sturm, Ruger still possesses no debt on its balance sheet. Smith & Wesson is catching up with Ruger on that front with a 13% year over year reduction in long term debt to equity going from 44% in the 3^rd quarter of fiscal year 2011 to 28% in its most recent quarter. Smith & Wesson also expressed an interest in paying down more debt in the future.

Conclusion

In summary, when fears stemming from politics and crime rates subside a little, demand will fall and some of the back orders will mysteriously disappear without being converted to orders. The fundamental bubble driving the gun and ammunition rally will reverse in the short term. Meanwhile, the clean balance sheet of Sturm, Ruger and the deleveraging of Smith & Wesson’s balance sheet will give these companies the flexibility to operate through lean times, adding to the long term potential of both.

The article Gun Stock Earnings 5 Takeaways originally appeared on Fool.com and is written by William Bias.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.