Gun Maker Downgrade Brings Value Back To Gun Stocks

Gun sales in America have been nothing short of robust.  It seems that the election cycle is placing another round of urgency for gun buyers to hit the stores.  That being said, the question may boil down to one of valuation after an analyst raised the red flag on Wednesday. This may have also brought some value back into what had been a premium valuation.

KeyBanc Capital Markets downgraded both Smith & Wesson Holding Corporation (NASDAQ: SWHC) and Sturm, Ruger & Co. Inc. (NYSE: RGR) after huge runs higher in these shares.  After a gain of 200% in Smith & Wesson and a gain of over 60% for Sturm Ruger in the last year (and still up 100% from the 52-week low), this is an obvious valuation concern.  If gun sales are so strong this year, how strong can they be in 2013 after the election cycle.

You probably heard the term ‘peak oil’ back in the oil boom of 2008.  Now this call is effectively calling this a ‘peak firearms’ trend.

Sturm Ruger has actually held up better today as its shares are down ‘only’ 6.4% at $45.07.  It had already backed off of highs more than its rival and the 52-week range is $23.86 to $58.42.

Smith & Wesson Holding Corporation shares are down by 9.5% at $8.83 versus a 52-week range of $2.29 to $10.25. After the drops today, both Smith & Wesson and Sturm Ruger trade at about 14-times the fiscal consensus estimates.

What is interesting is that may make these valuations reasonable enough.

JON C. OGG