Sturm, Ruger & Company vs. Smith & Wesson Brands: Which Gun Stock is a Better Buy?

Sturm, Ruger & Company, Inc. (RGR) and Smith & Wesson Brands, Inc. (SWBI) are two prominent firearm manufacturing companies in the United States. RGR designs manufactures, and sells firearms and castings to domestic customers through federally licensed, independent wholesale distributors. It also manufactures and sells accessories and replacement parts for its firearms. In comparison, SWBI designs, manufactures, and sells firearms products and offers forging, machining, and precision plastic injection molding services. It serves gun enthusiasts, sportspeople, hunters, individuals desiring home and personal protection, and security agencies.

While the government is increasingly focusing on gun control and legislation, rising geopolitical tensions and increasing concerns of individuals over personal safety since the pandemic have boosted the demand for firearms and ammunition. The reintroduction of popular firearms and new, improved technologies should enable the industry to grow substantially. The global ammunition market is expected to grow at 4% CAGR to reach $11.85 billion by 2030. So, both RGR and SWBI should benefit.

RGR is a winner with 0.8% gains versus SWBI’s negative returns in terms of the past month’s performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

On December 20, 2021, RGR announced the initial production and shipment of Ruger-made Marlin lever-action rifles. After acquiring the popular Marlin firearms brand back in November 2020, RGR’s engineering team reintroduced the Marlin 1895 SBL Lever-Action Rifle, produced using modern manufacturing methods. Using improved manufacturing processes that deliver reliable, attractive firearms, RGR is looking forward to introducing additional Marlin models, calibers, and variations over the coming years.

On September 30, 2021, SWBI announced plans to move its headquarters and significant elements of its operations to Maryville, Tennessee, in 2023. This was decided due to rising concerns over legislation recently proposed in Massachusetts that, if enacted, would prohibit SWBI from manufacturing certain firearms in the state that are legal in almost every state in America. As SWBI generated 60% of its revenues last year from selling these firearms, the company considered it wise to relocate to a business-friendly environment.

Recent Financial Results

RGR’s total net sales for the fiscal 2021 third quarter, ended October 2, 2021, increased 22.3% year-over-year to $178.25 million. The company’s gross profit came in at $64.80 million, indicating a 26.7% rise from the prior-year period. Its operating income came in at $46.73 million, up 42.2% from the prior-year period. Its net income came in at $35.20 million for the quarter, representing a 42.2% rise from its year-ago period. Its EPS increased 42.5% year-over-year to $1.98. The company had $27.68 million in cash and equivalents as of October 2, 2021.

For its fiscal 2022 second quarter ended October 31, 2021, SWBI’s net sales decreased 7.3% year-over-year to $230.48 million. The company’s non-GAAP gross profit came in at $103.09 million, indicating a 2% rise from the year-ago period. Its non-GAAP operating income came in at $70.98 million, representing a 2.4% rise from the prior-year period. While its non-GAAP net income increased 4.6% year-over-year to $55.26 million, its non-GAAP EPS increased 21.5% to $1.13. The company had $159.39 million in cash and cash equivalents as of October 31, 2021.

Past and Expected Financial Performance

RGR’s total assets grew at a CAGR of 10% over the past three years. RGR’s EPS is expected to grow 68.4% year-over-year in the fiscal year 2021, ending December 31, 2021. The company’s revenue is expected to increase 30.4% year-over-year in fiscal 2021.

In comparison, SWBI’s total assets decreased at a CAGR of 13.1% over the past three years. Analysts expect SWBI’s EPS to decrease marginally in fiscal 2022, ending April 30, 2022. Its revenue is expected to decline 12.7% year-over-year in fiscal 2022.

Valuation

In terms of forward EV/Sales, RGR is currently trading at 1.32x, 71.4% higher than SWBI’s 0.77x. In terms of forward EV/EBITDA, SWBI’s 2.26x compares with RGR’s 4.12x.

Profitability

SWBI’s trailing-12-month revenue is almost 1.5 times RGR. SWBI is also more profitable with a 25.7% net income margin versus RGR’s 20.4%.

Furthermore, SWBI’s ROE, ROA, and ROTC of 97%, 50.5%, and 68.8% compare favorably with RGR’s 51.6%, 34.3%, and 43%, respectively.

POWR Ratings

While RGR has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, SWBI has an overall C grade, equating to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both RGR and SWBI have an A grade for Quality, consistent with their higher-than-industry profitability ratios. RGR’s 20.4% trailing-12-month net income margin is 211.5% higher than the 6.6% industry average. SWBI has a 25.7% trailing-12-month net income margin, 292.3% higher than the industry average of 6.6%.

In terms of Momentum, both RGR and SWBI have been graded a C, which is in sync with its mixed price performance over the past year.

RGR has a C grade for Growth. It had a 45.8% operating cash flow growth over the past year, which is slightly lower as compared to its peers. SWBI’s F grade for Growth is in sync with its lower-than-industry operating cash flow growth over the past year.

Of the 74 stocks in the Air/Defense Services industry, RGR is ranked #9. In contrast, SWBI is ranked #17 of the 37 stocks in the B-rated Athletics & Recreation industry.

Beyond what we have stated above, our POWR Ratings system has also rated RGR and SWBI for Stability, Sentiment, Value, and Growth. Get all RGR ratings here. Also, click here to see the additional POWR Ratings for SWBI.

The Winner

Surging demand for firearms and ammunition should help both RGR and SWBI profit in the coming months. However, better analyst sentiment makes RGR a better buy here.

Our research shows that the odds of success increase if one bet on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Air/Defense Services industry, and here for those in the Athletics & Recreation industry.

RGR shares were trading at $66.78 per share on Friday afternoon, up $1.08 (+1.64%). Year-to-date, RGR has declined -1.82%, versus a -7.34% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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