Wednesday, April 6, 2011

Weak Industry?

Josh Sugarman, Executive Director of the Violence Policy Center, had an article in the Huffington Post on Monday with his analysis of the retracted Freedom Group IPO. Based on this one company, he said the gun industry was in decline due to a "a cratering gun market".

I guess the folks at Sturm, Ruger didn't get the message that their market was "cratering". They announced on Monday the results of the share repurchase program.
Sturm, Ruger & Company, Inc. (NYSE-RGR), today announced that during the first quarter of 2011 the Company repurchased 133,400 shares of its common stock for $2.0 million in the open market. The average price per share repurchased was $14.94. These repurchases were funded with cash on hand. At the end of the first quarter of 2011, $8.0 million remains authorized and available for share repurchases and 18.9 million shares remain outstanding.
Rarely do weak companies repurchase their own stock. The primary reason is that they don't have the cash on hand for the transaction. You will note that Ruger used cash on hand to fund these repurchases.

Stock repurchases generally increase shareholder value and are a positive thing. Ruger paid an average price of $14.94 per share. Yesterday's closing price for Ruger (RGR) stock was $23.00 per share. That is a 53.9% increase.

The stock market obviously doesn't perceive that Ruger is in a "cratering gun market". According to website Seeking Alpha, in mid-March when the S&P 500 dropped 4.3%, Ruger was one of the companies that bucked the trend.

The bottom line is that certain segments of the firearms market are stronger than others. Handguns are the hot segment of the firearms market. This is especially true of smaller, more concealable handguns. Freedom Group - other than Remington's 1911R1 - is not in the handgun business. Ruger is in the handgun market and has moved strongly into the smaller pistols and revolvers. The results of that move are evident in its stock price.

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