Description

I think in the low-40s, Sturm, Ruger & Co. (“RGR”) again makes an excellent GARP investment as one is paying 8-9x through-the-cycle UFCF for a high quality (albeit cyclical) branded consumer goods company that’s led by a very disciplined and shareholder-friendly management team. I last profiled RGR 5 years ago and am writing this up again because this reflects our core strategy of investing in cyclical but high-quality companies, hopefully buying in somewhere close to the bottom and then letting management do their magic. Given large cash balance, idiosyncratic demand drivers, and at the present valuation, I think RGR shares here have a very attractive risk-reward profile.

Overview

RGR needs little introduction, you can refer to my previous writeup here or any of the other write-ups of RGR or its competitor Smith & Wesson / American Outdoor Brands Corp (not the current AOUT, which is the AOBC spin-off before AOBC re-renamed itself Smith & Wesson). To me, it is remarkable how the recent small-cap sell off has again opened the opportunity to invest in RGR at the present share price of $43.56, which represents a market cap of $770mn and an enterprise value of $653mn.

A few numbers can be worth a thousand words, so here is an overview of some key statistics for the period of 2019 – 2023, which is the time since my write-up and roughly covers a cycle from trough to trough (I hope):

1. EBITDA: LTM of $76mn, average of $132mn p.a., peak of $233mn (2021)
2. EBIT: LTM of $54mn, average of $105mn p.a., peak of $207mn (2021)
3. Net income: LTM of $48mn, average of $83mn, peak of $156mn (2021)

Company inventory has been a bit of a drag on cash flow post-COVID boom, but overall, RGR paid dividends of $340mn cumulatively during the past 5 years (total of $19.38 per share, the IRS sends their regards). With regards to inventory, let’s just say RGR management had learned their lessons when RGR practically and, frankly, quite incredibly almost sold out during the COVID-induced outdoor boom. Thus, management is probably keeping around a bit more inventory compared before and compared to what current order levels would suggest is necessary.

Yes, I would have preferred more than the $14mn of buybacks over the same period, but management remained highly disciplined when its own share price was (relatively) high, and have really stepped-up buybacks since the shares crashed through $50. Yes, I would’ve preferred management being more aggressive in the Remington bankruptcy, out of which they only picked up Marlin, but it is what it is.

The Next Cycle

One can track NICS, but frankly, no one knows. The gun manufacturers don’t know, the distributors don’t know, the retailers don’t know. The customers probably don’t know either. However, 2024 is another election year and there is always some risk that the Dems will going through their usual election winners of (i) taxing “the rich”, (ii) abortion, and last but not least (iii) gun control. God forbid that there is going to be another insurrection, which may lead to increased gun demand, which would be again a positive for RGR. In the meantime, RGR shareholders will get to clip their (presently) 3% dividend yield and enjoy some tailwind from the share buybacks.

Risks

The biggest risk (but also opportunity in terms of near-term sales) is obviously (i) anti-gun legislation, followed by (ii) an unexpected deterioration in end market sales, and (iii) a value destructive acquisition. Given historical precedents and our belief in the Second Amendment we think these are acceptable risks to bear for buying a high-quality compounder led by a great management team.

Disclaimers

The author and affiliates may or may not have material positions in issuers and securities mentioned in this note and will not be obligated to give notice of any changes in their views or positioning. You agree to hold the author harmless and to waive the right to any legal action against the author in relation to this note. The views expressed here reflect the author’s personal views about the issuers and securities and do not constitute investment advice. The author makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information. This note is for information purposes only and should not be construed as either projections or predictions. Before making any investment decision, you should seek independent investment, legal, tax, accounting or other professional advice as appropriate, none of which is offered to you by the author in this note. The author accepts no duty of care to you in relation to investments. Past performance cannot be relied on as a guide to future performance. You should not assume that the performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels. Any investment or investment strategy can be impacted by numerous factors, including market and economic conditions, and may result in a loss to investors. As with any investment, there can be no assurance that any investment objectives or strategies will be achieved or that an investor will not lose a portion or all of its investment.

Catalyst

Frankly, there is no hard catalyst for RGR per se. Apart from our expectation of improving financials in the near term, one should look out for either (i) a major acquisition (and I am not aware of (m)any opportunities at the moment, or (ii) continued buybacks / dividends.