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Analysis: Thinking of buying gun-maker stocks? You better be careful

MarketWatch logo MarketWatch 6 days ago Philip van Doorn

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Video by The Street

Shares of some weapons manufacturers have soared, but sales numbers don’t look very good.

After every mass shooting, there are inevitable headlines saying gun manufacturer stocks have rallied. Then, very often during earnings season, there is a nasty surprise for shareholders, as a company disappoints with sales, earnings or its outlook. So what is going on with industry?

It might seem logical after a mass shooting to expect politicians on the federal or state level to begin negotiations on legislation to curb firearms sales in some way. Or one may also expect this if a gun-control advocate is elected.

Either circumstance would be expected to lead to a short-term spike in sales of weapons and ammunition, which might make shareholders of the right companies a lot of money. But introducing a bill, negotiating it, passing it and having it signed by a president or governor is no easy task. Buying a stock on the expectation that legislation will lead the federal government or state governments to curb weapons sales is a very risky business. The pop of a gun-maker’s stock following a mass killing or election can be very short lived.

a close up of a map © Provided by Dow Jones & Company, Inc.

Also read: Gun-maker stocks rally after mass shooting in Las Vegas.

On Thursday, shares of Vista Outdoor (VSTO) were down as much as 33%, after the company missed analysts’ consensus sales estimate for its fiscal second quarter and lowered its full-year outlook. The stock has now plunged 41% over the past three months, while the S&P 500 index (SPX) has gained 3.8%.

This makes for a particularly ugly 12-month chart:

a screenshot of a video game: It has been a year of suffering for shareholders of Vista Outdoor Inc. © Provided by Dow Jones & Company, Inc. It has been a year of suffering for shareholders of Vista Outdoor Inc.

What’s going on here? We decided to take a broad look at publicly traded U.S. manufacturers of small firearms and related companies that make different types of weapons that consumers can buy, or that make accessories for firearms that are available to consumers.

We prepared the list with help from FactSet and excluded major aerospace/defense government contractors and excluded stocks priced below a dollar and companies for which at least a year’s worth of financial data wasn’t available from FactSet. So the list is relatively short.

Here are the companies, sorted by market capitalization as of the market close on Nov. 8:

CompanyTickerMain businessMarket capitalization ($mil)Total return - 2017 through Nov. 8Total return - 3 yearsTotal return - 5 years
OlinOLNChemical products, ammunition through Winchester segment$6,11346%61%107%
Axon EnterpriseAAXNConducted electrical weapons$1,132-12%16%165%
Vista OutdoorVSTOFirearms, ammunition, other sports products$1,052-50%N/AN/A
Sturm, Ruger & Co.RGRFirearms$872-3%45%24%
National Presto IndustriesNPKHousewares/ Small appliances, ammunition and related products$82918%129%128%
American Outdoor BrandsAOBCFormerly Smith & Wesson Holding Corp., firearms and accessories$742-35%38%30%
VirTra VTSIFirearms training simulators$4916%138%490%
Optex Systems HoldingsOPXSOptical sighting systems$858%-92%-89%
FactSet

You can click on the tickers for more information about each company, including news, charts, price ratios and financial reports.

Some of the longer-term returns are quite impressive, but you can see from this year’s returns, not to mention Thursday’s brutal action for Vista Outdoor, how volatile these stocks can be.

Here’s the same group again, in the same order, showing changes in sales gross profit margins, for their most recently reported quarters:

CompanyTickerSales - most recent reported quarter ($mil)Sales - year earlier ($mil)Change in salesGross margin - most recent quarterGross margin - year earlier
Olin OLN$1,555$1,4537%13.58%11.59%
Axon Enterprise AAXN$90$7226%55.13%64.80%
Vista Outdoor VSTO$587$684-14%23.66%27.09%
Sturm, Ruger & Co.RGR$105$161-35%28.83%31.13%
National Presto Industries Inc.NPK$71$93-24%N/A19.84%
American Outdoor BrandsAOBC$129$207-38%31.49%42.31%
VirTra VTSI$5$355%71.41%58.34%
Optex Systems HoldingsOPXS$4$5-18%20.20%20.27%
FactSet

A company’s gross margin is its sales, less the cost of goods sold, divided by sales. It is a measure of the profitability of a company’s core business. It excludes overhead. For Vista Outdoor, you can see that not only were sales down significantly, the gross margin was declined. This could indicate a high level of discounting, which wasn’t enough to keep sales from dropping.

So even though mass shootings continue to feed controversy over whether or not the U.S. needs a greater level of gun control, it is clear that for most of these companies, the recent sales trend hasn’t been very good. Maybe a lack of demand is the problem, believe it or not as Paul Brandus discussed last year.

Yes, some investors have made a lot of money holding certain gun-maker stocks over the long term. But if you wish to jump in now, you had better do plenty of research and be ready to ride out volatility.

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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