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Why gun stocks plunged in August

The Motley Fool logo The Motley Fool 9/8/2017 Travis Hoium

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Gun stocks dropped like a rock across the board in August. Sturm, Ruger & Company (RGR), American Outdoor Brands (AOBC), and Vista Outdoor (VSTO) all dropped double digits, according to data provided by S&P Global Market Intelligence, as a wave of bad news hit the industry. 

The domestic gun industry is actually suffering from operating conditions that are too favorable, which sounds a little crazy on the surface. But when you dive into the numbers it's entirely predictable that gun stocks are having a terrible 2017. 

What happened in August

The drop in gun stocks last month was largely due to confirmation that people aren't buying as many guns as they were a year ago. Sturm, Ruger & Company's sales fell 22% to $131.9 million in the second quarter of 2017 and net income fell 53% to $10.2 million. Vista Outdoor's fiscal first quarter sales for the quarter ended July 2, fell 9.8% to $568.7 million and net income dropped 42.8% to $16.7 million. American Outdoor reported a 3.6% increase in sales for the fiscal fourth quarter ended April 30, 2017, the most recent data available, but that included the acquisition of Taylor Brands, Crimson Trace, and UST Brands in the past year. 

The macro data reinforces the decline in sales as well. Purchases run through the National Instant Criminal Background Check System dropped from 2.2 million in July 2016 to 1.7 million in July 2017. There's little urgency to acquire a gun with President Trump in the White House and Republicans controlling Congress, so sales will naturally drop. 

The irony of gun stocks

What's odd about gun companies is that the drop in sales in 2017 was easily predictable. There's typically a surge in gun sales when either a Democratic presidential candidate wins office or when there's a mass shooting. It's sad but true that the threat of restrictions is really what drives gun sales in the U.S. 

The fact that Republicans will control both the White House and Congress for at least the next 18 months and the executive branch until 2021 puts significantly less urgency on gun purchases. And with a favorable policy environment for the next few years, it's unlikely sales will spike soon. 

What to do with gun stocks now

A decline in gun sales will certainly take a bite out of earnings as manufacturing and operating costs are spread over fewer sales. For now, gun makers aren't expecting the tough operating condition to result in net losses in the foreseeable future, indicated by guidance for the next few quarters. 

What investors will want to keep an eye on is the long-term sales trend. If revenue continues to drop double digits it will be harder and harder to stay profitable, even if the policy environment for gun makers appears to be favorable. It's ironic, but the worst thing that can happen to gun stocks is a government that's in favor of gun ownership, which investors are seeing very clearly in 2017.

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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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