Over the past six months, Ruger’s shares (currently trading at $34.27) have posted a disappointing 13.1% loss, well below the S&P 500’s 11.6% gain. This might have investors contemplating their next move.
Is now the time to buy Ruger, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Ruger Will Underperform?
Despite the more favorable entry price, we're swiping left on Ruger for now. Here are three reasons there are better opportunities than RGR and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Ruger’s sales grew at a sluggish 3.4% compounded annual growth rate over the last five years. This fell short of our benchmark for the consumer discretionary sector.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Ruger, its EPS declined by 14.6% annually over the last five years while its revenue grew by 3.4%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Ruger’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Ruger doesn’t pass our quality test. After the recent drawdown, the stock trades at 19.3× forward EV-to-EBITDA (or $34.27 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.
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