Can Sturm Ruger Still Prosper?

 | Dec 17, 2012 | 10:00 AM EST  | Comments
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Sturm Ruger (RGR) shares have dropped 22% in price in the past two weeks, partly as a result of Friday's massacre of mostly school children by a disturbed young man in Connecticut.

My feelings about this as a citizen and as an investment analyst are somewhat in conflict.

As a citizen, I think firearms should be licensed much the same way cars are. I advocate tighter gun control than we have now.

As an investment analyst, I think it is unlikely that my views will prevail. The nation did not enact strict gun control laws after the Columbine High School massacre of 1999, the Virginia Tech killings of 2007, or any of several fatal attacks that took place at schools.

Public indignation may be – indeed, should be -- especially high this time, because of the young age of the victims. But history suggests that the public anger won't translate into successful legislation.

President Obama has expressed dismay at the shootings and has said, "We can't tolerate this anymore. These tragedies must end. And to end them we must change."

I don't question his sincerity, but I don't believe that the Obama administration will make a major push for gun control at a time when the nation's budget and economy are hanging so much in the balance. In addition, the president's remarks may imply a need for better psychological counseling and early warning systems. Gun control isn't the only issue.

Sturm Ruger, the nation's largest manufacturer of rifles and handguns, would still have a business – in my opinion, a good business – even if gun control laws were tighter than they are now. However, stricter laws would slow the company's growth, which has been remarkable.

In 2011, Sturm Ruger's revenues grew about 29%, profits about 43%. For the past five years, the compound average earnings growth rate has been 42%. Over the past 10 years, Sturm Ruger shares have sold for a median level of 21x earnings. Today they sell for just under 15 times earnings.

The company has about $75 million in cash, no short-term debt and no long-term debt. Last year it earned a return on stockholders' equity of 39%, a remarkably high figure.

If you make your investment decisions objectively -- and if owning shares in a firearms manufacturer doesn't violate your personal ethical guidelines for investment -- Sturm Ruger is probably a good purchase now at about $46. Should it drop to below $40, perhaps because the gun-control discussion gets more serious, I think it would be an excellent value.

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