Sturm, Ruger, and Co.

(RGR)

Michael Nimerfroh, Andrew Lu

Vick Liu, Joseph Vasile
1

Introduction
Table of Contents

i)

Business Description and Industry Overview

ii)

Investment Thesis

iii)

Thesis Point 1: Loosened Firearm Regulation

iv)

Thesis Point 2: Tightened Firearm Regulation

v)

Thesis Point 3: Ban on Firearms

vi)

Valuation

vii)

Risks and Summary

Overview
Summary / Key Takeaway

RGR is a firearm manufacturing company that

produces a variety of gun types including:
Bolt- action rifles
Shotguns
Centerfire pistols
Single Action Revolvers
They also manufacturer casings and firearm accessories
Reason Mispriced

Due to recent concerns of impending firearm regulation

the market has responded negatively to RGR
RGR focuses mainly on handguns and therefore is less
likely to be negatively affected from future regulations
In the event that regulatory measures are lifted or
relaxed, the entire gun industry will experience growth
from increased sales and a larger market

Company Ticker

Units:

Price (as of 09/13/2016)

$56.16

Diluted Shares Outstanding

18.71 M

Market Cap

$1050.75 M

(-) Cash

$69.25 M

(+) Debt

$43.63 M

(+) Preferred and Other

Enterprise Value

$1124.30 M

Key Financials / Multiples

EV / LTM EBIT

11.71

EV/ LTM EBITDA(R)

8.41

P/LTM LFCF or EV/LTM UFCF

12.94

P/E

15.38

Gross Margin

31.21%

EBIT Margin

17.47%

EBITDA Margin

24.32%

Business Description
Firearm Manufacturing

RGR is one of the largest gun manufacturers in the world, specializing in their flagship firearm,
the Ruger Revolver

Revenue Breakdown:
Pistols and Revolvers (~60%)
Rifles and Shotguns (~35%)
Accessories (~5%)

RGRs firearms are primarily distributed through its network of wholesale marketers
(Davidsons, Lipseys, Sports South)

RGR is headquartered in Southport, CT with regional facilities in New Hampshire, Arizona, and
North Carolina

RGR currently manufacturers 17 pistol, 10 revolver, and 15 rifle models

Industry Overview
Competition Amongst Firearm Industry
The firearm manufacturing industry is highly competitive; however, a select few companies are
responsible for the majority of the firearms produced in US
Smith and Wesson
Remington
Colt

RGR is the largest producer of pistols and revolvers in terms of sheer volume and percentage
of total sales

The majority of all sales occur domestically with most companies exporting 5% - 10% of their
total units sold

Many of the industry competitors are privately-owned with the exception of Smith and Wesson
(SWHC)

There is an estimated 270 million registered guns in the U.S. currently

Approximately 44% of American households own at least one firearm

Introduction
Table of Contents

i)

Business Description and Industry Overview

ii)

Investment Thesis

iii)

Thesis Point 1: Loosened Firearm Regulation

iv)

Thesis Point 2: Tightened Firearm Regulation

v)

Thesis Point 3: Ban on F

vi)

Valuation

vii)

Risks and Summary

Investment Thesis
Profitable Regardless of Gun Regulation
I.

Firearm regulation loosens in the coming years, encouraging growth in the industry
Background checks become more relaxed, allowing more people to purchase firearms
With a wider market base, RGR experiences steady growth and increased revenue

II. Firearm regulation tightens, limiting the production of long guns (rifles, shotguns)
Gun enthusiasts will respond by purchasing more weapons available to them (pistols, revolvers)
Manufacturers of long guns will be forced to alter their business model

III. Firearms are completely outlawed and their production is ceased

This scenario is highly unlikely due to political and social support of firearms
In the event that it occurs, RGR and its competitors would cease to operate

Firearm Regulation
History of Firearm Regulation

Over the past half century, gun regulation has become more strict, mainly on long firearms
Gun Control Act: stricter background checks and eliminated mail order gun services (1968)
Brady Handgun Act: Increased the waiting period for purchasing a handgun to five days (1994)
Federal Assault Weapons Ban: prohibited used of firearms defined as assault weapons and large capacity
magazines (1998)

This constant pressure has resulted in a strong resistance by pro-gun advocates and lobbyists
NRA: Supported acts of firearm regulation until the early 21st century when they felt it became intrusive
GOA: More extreme than the NRA and often has harsher or opposing views to those of the NRA
SAF: Concerned with the media portrayal of firearms and works to educate those on the legislation and safe
ownership of firearms

Introduction
Table of Contents

i)

Business Description and Industry Overview

ii)

Investment Thesis

iii)

Thesis Point 1: Loosened Firearm Regulation

iv)

Thesis Point 2: Tightened Firearm Regulation

v)

Thesis Point 3: Ban on F

vi)

Valuation

vii)

Risks and Summary

Loosened Firearm Regulation

Widespread Concealed Carry

10

Recent strides in loosening firearm regulation have come with respect to handguns

Now legal in all fifty states as of 2015

In the past fifteen years, 29 states have enacted concealed carry

RGR is the manufacturer of 5 of the top 10 registered concealed carry weapons

Loosening Firearm Regulation

Effects on RGR

Repeal of current restriction would most likely target handguns (pistols, revolvers)

This is the majority segment of RGR business, they currently manufacture six pistols and four revolvers that
classify as concealed carry weapons

Loosening regulation would expand their potential market and ability to attract new customers

Reducing licensing fees would incentivize more of the general public to obtain a concealed carry weapon

Revenue From Gun Sales ($MM)

11

Sales as Percent of Total Revenue

2012

2013

2015

2015

Rifles

143.9

214.6

203.9

208.5

Pistols

216.5

293.3

198.2

Revolvers

92.7

108.2

112.8

2012

2013

2014

2015

Average

Rifles

32%

35%

40%

41%

37%

192.2

Pistols

48%

48%

38%

37%

43%

113.3

Revolvers

20%

18%

22%

22%

20%

Introduction
Table of Contents

12

i)

Business Description and Industry Overview

ii)

Investment Thesis

iii)

Thesis Point 1: Loosened Firearm Regulation

iv)

Thesis Point 2: Tightened Firearm Regulation

v)

Thesis Point 3: Ban on Firearms

vi)

Valuation

vii)

Risks and Summary

Tightening Firearm Regulation

Restriction on Assault Weapons and Magazines

Anti-gun protestors are advocating for bans on assault weapons and large round magazines

Similar to Assault Weapon Ban (1998); now with stricter regulations

Recent domestic acts of terror have bolstered the support of this movement due to assault
weapons correlating with increased fatalities

Sandy Hook, San Bernardino, Pulse Nightclub

The perpetrators in each of these event was carrying an AR-15 style assault rifle

In response to these events, firearms with features similar to an AR-15 have been banned or their
accessibility to the public has been heavily reduced

Abrupt increases in firearm regulation often spur increased sales among firearm enthusiasts

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They stockpile their weapons in fear of future regulation and restrictions

Tightening Firearm Regulation

Increased Background Checks

The most supported and effective increase in regulation has been more detailed background
checks
With great opposition to a ban on firearms, pro-gun lobbyists have conceded an increase in background checks
Background checks prevent prior criminals or those who are mentally handicapped from purchasing firearms
Since their increase, background checks have had little to no effect on the market size of firearms consumers
Background Checks per Year (Mm)
25

20

15

10

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

14

Tightening Firearm Regulation

Effects on RGR

The two most common increases in firearm regulation would have least effect on RGR
compared to industry competitors

Background check rejection rate is only 1%-2% for past 15 years

Thus there is little decrease in market size

Unlike its competitors, RGR only has three of forty models that would fall under the description of assault
rifles

Estimated Revenue By Gun Type

15

2012

2013

2014

2015

Ruger AR 556

8.0

11.9

11.3

11.6

Ruger SR 556

6.9

10.2

9.7

9.9

Ruger SR 762

6.0

8.9

8.5

8.7

Total Rifle Sales

143.9

214.6

203.9

208.5

Introduction
Table of Contents

16

i)

Business Description and Industry Overview

ii)

Investment Thesis

iii)

Thesis Point 1: Loosened Firearm Regulation

iv)

Thesis Point 2: Tightened Firearm Regulation

v)

Thesis Point 3: Ban on Firearms

vi)

Valuation

vii)

Risks and Summary

Ban on Firearms
Likelihood of Complete Ban on Firearms

The possession of firearms is legally protected under the Second Amendment of the
Constitution
In the past, activists have attempted to ban a subset of firearms (pistols, rifles) or firearms altogether
Most recently, the case Caetano v. Massachusetts ruled that the 2nd Amendment protects all firearms, even those
not it existence at the time of the founding
The Supreme Court overruled Chicagos ban on all pistols, citing that the 2nd Amendment protects the
possession of all firearms for the use of home defense

It is rather unlikely that there would be a complete ban on firearms

In the event of a total ban, RGR would suffer greatly and their current business model would be obsolete
RGR does not currently have large and long-term contracts with military and law enforcement
Only one pistol manufactured by RGR is currently carried by law enforcement officers (LC9)

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Introduction
Table of Contents

18

i)

Business Description and Industry Overview

ii)

Investment Thesis

iii)

Thesis Point 1: Loosened Firearm Regulation

iv)

Thesis Point 2: Tightened Firearm Regulation

v)

Thesis Point 3: Ban on Firearms

vi)

Valuation

vii)

Risks and Summary

Valuation
Bull Case: Assumptions

The revenue projection assumes that decreasing gun regulations would boost revenue from all
classes of firearms
Revenues from pistols and revolvers would increase as they are the most common choices for concealed carry
weapons
Revenue from rifles would increase less significantly; however, with a larger market base a small increase
would be realized

In each of the three classes, the revenue increase steadily declines over the next six years as the
effects of the policy changes would have diminishing effects on the

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Valuation
Bull Case: Decreased Gun Regulation

20

Decreased gun regulation would spur an increased in the purchase of long firearms such as rifles
Regulation supporting concealed carry would expand RGRs market for pistol and revolver sales
The greatest increased would be seen in the pistol and revolver segment, since these are the two
types of guns used for concealed carry and loosening concealed carry restriction is the most
likely form of decreased gun regulation

Valuation
Bear Case: Assumptions

The model assumes that each consumer will buy an equal amount of firearms as any other
consumer in a given year
Therefore, there will be a 1%-2% decrease in sales from the enforcement of stricter background checks

The model also assumes that each rifle subject to ban is of equal popularity
The three assault rifle models occupy 5% of total revenue from rifles

Due to the ban, the model assumes that there is an increase in legal rifles and handguns
Consumers would stockpile other weapons in fear of further regulation
This increase in sales would offset the decrease in the select few rifles that would be banned

21

Valuation
Bear Case: Increased Gun Regulation

22

Increase gun regulation would target assault style weapons and further ban them from the public

This would results in RGR not being able to sell 3 of their 15 models for rifles, which only
accounts for an estimated 5% of their rifle manufacturing business

Introduction
Table of Contents

23

i)

Business Description and Industry Overview

ii)

Investment Thesis

iii)

Thesis Point 1: Loosened Firearm Regulation

iv)

Thesis Point 2: Tightened Firearm Regulation

v)

Thesis Point 3: Ban on Firearms

vi)

Valuation

vii)

Risks and Summary

Risks and Summary

Risks Associated with Thesis

The thesis hinges on the fact that there are only two distinct way in which the firearm industry
can be either more or less regulated
Decreased concealed carry restriction
Increased ban and restriction on assault style rifles

The government could implements a hybrid of these policies or completely new policies

The thesis also assumes that in the event of an increase in regulation on rifles, consumers would
treat pistols as a substitute good and purchase more handguns

RGR does not maintain large contracts with the military or law enforcement, hereby reducing
the stability of their consumer base in the events of sweeping regulatory changes

The final risk is that there could be unforeseen changes in the thesis in the coming months due
to the upcoming election
Either candidate may attempt to make radical changes in an effort to gain support and establish
a precedent

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Risks and Summary

Summary

The analysis and thesis of RGR is two fold; increase or decreased gun regulation
RGR is positioned to do well in either environment due to its handgun intensive business model
Revenue from trading gains decreased as market making activities were phased out

In an environment of increased government regulation of firearms:

RGR would see a decrease in their sales of assault style weapons
Firearms fitting this description only account for ~5% of RGRs total revenue
Customers would be likely to substitute such weapons for other RGR rifles or handguns

In an environment of decreased government regulation of firearms:

Concealed carry laws would be loosened, allowing more civilians to purchase and carry small pistols
This is the bulk of RGR and therefore would see an increase in total sales and an increase in customer base
Other segments of RGR would also benefit as would the entire firearm manufacturer industry

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