Generally, companies that suffered dramatic losses in the capital market should be avoided, particularly earnings losers like Sturm Ruger (NYSE:RGR). With the tragic escalation of gun violence impacting the sensibilities of the American public, it’s understandable why investors rushed for the exits. Nevertheless, the rise of the total addressable market, along with a demographic twist, could be enticing for politically-agnostic investors. Therefore, I am bullish on RGR stock.
RGR Stock Tumbles Following Its Q3 Disclosure
While the third quarter has been a strong season for the U.S. economic machinery – which posted much stronger-than-expected preliminary GDP growth figures, per TipRanks reporter Yulia Vaiman – the same could not be said about firearms and ammunition manufacturer Ruger. Unsurprisingly, given the disappointing disclosure, RGR stock tumbled.
Specifically, the controversial company posted net income of $7.43 million or 42 cents per share. However, this figure contrasted badly with the year-ago quarter’s bottom-line print of $18.39 million or $1.03 per share. Further, analysts, on average, expected Ruger to post earnings per share of 87 cents, excluding special items.
Adding to the woes, the firearms specialist only rang up sales of $120.89 million. Again, the latest figure contrasted poorly with the Q3 result of last year, which stood at $139.39 million.
Explaining some of the details tied to the financial disclosure, Ruger CEO Christopher J. Killoy stated that overall firearms demand declined. As a result, the company had to issue increased sales promotional activity, thus hurting margins. Additionally, other outside factors – including cost increases in materials, commodities, and wages – negatively impacted the bottom line.
Granted, these aren’t words that investors of RGR stock want to hear. Nevertheless, it’s important to realize that gun sales surged during the worst of the COVID-19 crisis. Stated differently, the total addressable market naturally increased because of this cynical catalyst.
For instance, Killoy emphasized that Ruger’s sales of new products represented 22.7% of its gun sales in the first nine months of 2023. That figure would almost certainly be less if the COVID-19 pandemic never materialized.
A Deep Discount Stemming from Ignorance
Last week, RGR stock fell by 16%. Without question, it’s a risky investment. At the same time, Wall Street doesn’t seem to understand the deep discount at hand, especially for long-term investors. The increased addressable market thesis is more important than lay observers realize.
First, the shooting sport inherently yields dopamine production. In other words, it’s a thrilling sport, and that means gun owners don’t usually stop at one piece. As statistics demonstrate, in the U.S., it’s likely that most gun owners buy several firearms. So, that’s one factor to keep in mind regarding the poor Q3 earnings report.
Second, and more importantly, the add-on purchases for firearms extend much further than buying ammunition (which, again, Ruger manufactures). Rather, gun owners quickly gravitate toward holsters, extra magazines, red-dot sights, long-range rifle scopes, and Picatinny rails to which said optics integrate with the frame of the firearm; the list truly can go on and on.
In addition, it’s vital not to forget “mundane” accessories such as cleaning kits. Ruger produces all of these items, adding significant upside potential for RGR stock.
Perhaps most importantly, the demographics of gun ownership have changed. As Mark Oliva, an executive at firearms industry trade group National Shooting Sports Foundation, remarked bluntly, “The idea that gun owners are only old, male, and pale isn’t holding true.” Instead, firearms enthusiasts are starting to reflect the rich diversity of America.
And that’s wonderful news for RGR stock. As numerous reports indicate, an increasing number of Americans identify as people of color. Rather than this demographic pivot being anti-gun, the data suggests otherwise.
While it’s an uncomfortable topic, the reality is that the market for firearms has expanded holistically. If you have the patience, RGR stock is well worth consideration.
Is RGR Stock a Buy, According to Analysts?
Turning to Wall Street, RGR stock has a Moderate Buy rating based on just one Buy rating assigned in the past three months. RGR stock’s price target is $64.00, implying 40.1% upside potential.
The Takeaway: RGR Stock Offers a Compelling Discount
In most circumstances, losing double-digit percentage points so quickly in the capital market presents extreme dangers. And even for Ruger, its narrative presents risks. Undoubtedly, the Q3 print didn’t do the company any favors. However, in the long run, RGR stock could prove to be undervalued. That’s because the rise of the total addressable market combined with the addictive nature of shooting bodes very well for industry players.
