Market analysts back away from gun makers

Market analysts backed away from gun makers last week after Smith & Wesson executives slashed the company’s forecasted annual sales by $100 million.

Maksim Netrebov, founder of New Jersey-based Maks Financial Services and contributor at Seeking Alpha, slammed the gun maker’s holding company, American Outdoor Brands, in a Dec. 11 article for evading questions regarding why the lowered guidance came only now — and not a year ago when President Donald Trump’s electoral victory left the industry flush with inventory and short on demand.

“If we are on the Titanic, the Iceberg is now visible, it is too late to stop the ship and the deck chairs are arranged,” he said. “The industry demand is deteriorating both significantly and quickly, the companies bet wrong and are now sitting on massive inventories, even larger manufacturing capacities which they spent billions on, and are playing ‘chicken’ with each other seeing who will blink first and cut their production.”

Those companies — American Outdoor Brands, Vista Outdoor and Sturm, Ruger and Co. —  have all reported diminished earnings over the last year, citing a return to seasonal sales patterns after lingering promotions die down, presumably by the year’s end.

As 2018 fast approaches, however, American Outdoor Brands CEO James Debney told investors the rock-bottom pricing will stick around awhile longer — a sentiment echoed by top executives at Vista and Ruger in November.

“We are not yet seeing the recovery that we expected to see,” said Vista Outdoor Chief Financial Officer Stephen Nolan during a conference call with investors Nov. 9. “Shooting sports has always been a cyclical industry with periodic downturns lasting anywhere from 12 to 24 months. While we may not be at the bottom as of yet, we believe that we are very close and we anticipate that the market will show returns to growth over the next 18 months.”

Vista’s second quarter earnings declined 25 percent, according the company’s filing with the Securities and Exchange Commission. Sales likewise dipped 16 percent, the company’s second double digit loss so far this year. Its shooting sports segment generated $296 million, a 19 percent decline over 2016 — the biggest on record for gun sales. Net profit for the segment nosedived 38 percent, Nolan said.

Ruger CEO Chris Killoy told investors last month the 53 percent decline in net profits — and the rest of Ruger’s financial statement, for that matter — proved just how “challenging” the third quarter was for the company, with little reprieve in sight.

“We offered more promotions that were moderately more aggressive than last year, but we did not chase our competitors’ offerings to achieve better short-term results,” he said. “We will continue to take a measured and thoughtful approach to sales promotions and rebate opportunities considering both the short-term benefits and the potential longer term implications both financial and reputational.”

The dismal results come after a strong first quarter for the company, which reported $167.4 million in sales — a 3 percent decline over first quarter 2016. Sales fell more than 35 percent to $104.8 million in the third quarter ending on Sept. 30, according to the company’s earnings reports. Second quarter sales likewise plummeted 22 percent. Overall, Ruger’s gun sales trail last year by nearly 20 percent.

Smith & Wesson’s revised guidance — coupled with a 36 percent decline in second quarter sales — sent its share prices plummeting 14 percent earlier this month.

“The best way I can describe the mood of the call with management and the analysts is as a somber wake up call or an intervention, one where the group admits they have a problem,” Netrebov said of the gun maker’s Dec. 7 conference call with investors. “‘Apparently’ to the management and analysts out there, this worsening of the firearms industry was unexpected.”

“Overall, it was quite clear again that most of the analysts were not ‘gun people’ and it was like vegan cooks asking a butcher to give them an update about the fine meats market,” he added.

Samuel Smith, a research analyst and fellow contributor at Seeking Alpha, admitted the error of his previously “bullish” outlook on gun stocks — even apologizing to readers who may have lost money after taking his advice.

“My personal recommendation is to sell your shares before the end of the year to get a tax write-off and then potentially repurchase as a speculative long-term play if prices dip well into the single digits,” he said. “For myself, I plan to lick my wounds, process my lessons learned, and steer clear of investing in the firearms industry until more clarity is gained on the projected length of the promotional activity. In the meantime, enjoy buying the cheap guns!”

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