Fireworks Sales Fizzle but Firearm Sales Sizzle

NEW YORK ( TheStreet) -- The Fourth of July has come and gone, but the sales of fireworks and the more expensive kind of publicly sold fireworks (Bottle-rockets, M-80s, and Cherry Bombs) were way down over last year.

Anecdotal stories from around the country abound. A Reuters article from July 3 with the headline "Fireworks Industry in the Biggest Slump since the Vietnam War" also caught my attention.

The article stated:

"As millions of Americans celebrate Independence Day on Wednesday, there are some whose holiday won't be going off with a bang. One of America's top fireworks firms said the industry, still suffering due to the nation's economic woes, is experiencing its toughest times since the Vietnam War era when the country was divided over such flashy displays of patriotism."

Those of us on the West Coast are hearing the same alarming news. There are all kinds of reasons proffered. Cuts in local governmental budgets, dry weather conditions and high fire dangers were some of the most persistent culprits mentioned.

Many also mentioned the nation's financial slump that is demonstrated by persistently high jobless conditions.

Yet, there is one industry involving gun powder and metals where the business has been off the chart and better than ever...especially since the presidential elections of 2008.

I'm referring to the firearms industry, the manufacturers of handguns and rifles. Sales are soaring year after year.

As recently as April 6, 2010, the National Shooting Sports Foundation had this to say including a most telling chart which illustrates the ongoing explosive growth of firearm sales:

"Those who have been tracking the sales of firearms recently will not be surprised at the accompanying chart, which shows the leading months for background checks based on the FBI's National Instant Criminal Background Check System. 

"All federally licensed firearms retailers must conduct a mandatory NICS check before completing the retail sale of any new or used firearm, making NCIS statistics a solid indicator of firearms sales."

The chart below shows the ranking by the month and year when the most firearms were sold and licensed, according to the above referenced organization (its latest charts and statistics run through 2010 and found here ).

We can see that firearms sales began to take off like a fireworks missile about the time of the election of President Obama.

This allegedly is because his administration is perceived as being against Americans owning guns of any type -- but especially semi-automatic and automatic pistols and rifles.

The article referenced and the chart are dated, but if you look at the sales growth and the price per share of two publicly traded manufacturers of firearms you'd know the trend is alive and well.

Sturm, Ruger and Company ( RGR) and Smith & Wesson ( SWHC) are seeing their sales numbers and earnings growths continue steadily since Obama was elected.

RGR, which pays a 3.2% dividend, reported its first-quarter 2012 revenue growth (year-over-year) increase by an impressive 49%.

Their quarterly earnings growth was doubly amazing, increasing by almost 95% year-over-year. This in the face of a persistent economy that feels recessionary although not yet officially.

Smith & Wesson, a name with loads of historical flair, has some financial statistics that tell a similar kind of growth story as RGR. Yet, there are some of glaring differences as well.

In fact, SWHC as of its most recent quarter ending April 30, 2012, has almost as much debt ($53.28 million) as it has total cash ($53.38 million).

The company pays no dividend, yet its fiscal fourth-quarter (ending April 30, 2012) and 2012 fiscal full-year financial results were a blow-out! Some of the highlights from the report are listed below:

Fourth Quarter Fiscal 2012 Financial Highlights
  • Net sales from continuing operations for the fourth quarter were a record $129.8 million, up 27.7% from the fourth quarter last year.  The increase was driven by strong sales of M&P¿ polymer pistols and M&P modern sporting rifles.
  • Gross profit for the fourth quarter was $46.9 million, or 36.1% of net sales, compared with gross profit of $31.2 million, or 30.7% of net sales, for the comparable quarter last year.  Gross profit was positively impacted in the quarter by significant one-time benefits relating to reductions in inventory and legal reserves.
  • Net income from continuing operations for the fourth quarter was $17.8 million, or $0.27 per diluted share, compared with net income from continuing operations of $4.4 million, or $0.07 per diluted share, for the fourth quarter last year.
  • Full Year Fiscal 2012 Financial Highlights
  • Net sales from continuing operations for the full fiscal year were a record $412.0 million compared with $342.2 million for the prior fiscal year, an increase of 20.4%.
  • Gross profit was 31.1% compared with 30.6% for the prior fiscal year.
  • Operating expenses were $83.1 million for fiscal 2012, or 20.2% of net sales, compared with operating expenses of $86.9 million, or 25.4% of net sales, for fiscal 2011.
  • Income from continuing operations was a record $26.4 million, or 40 cents per diluted share, compared with income from continuing operations of $8.1 million, or 13 cents per diluted share, a year ago.

    Smith & Wesson's "Financial Outlook for Continuing Operations" also gives clues that the firearms industry is anticipating continued record growth:

    "The company expects net sales from continuing operations for the first quarter of fiscal 2013 to be between $125.0 million and $130.0 million, which would represent year-over-year growth from continuing operations of over 36.0%.

    "The company anticipates net sales from continuing operations for fiscal 2013 of between $485.0 million and $505.0 million, which would represent year-over-year growth from continuing operations of over 17.0%."

    It's clear to see that both SWHC and RGR have undervalued characteristics. SWHC is selling at a forward P/E ratio of 11.56 and a PEG ratio (5-year expected) of only 0.60.

    RGR shares are selling at a forward P/E ratio of slightly over 14. Although their PEG ratio wasn't available, the company has no debt, total cash of almost $96 million and $32.20 million of levered free cash flow.

    The comparative one-year chart below of the stocks' performance is stellar. You may want to buy the dips and ride this ongoing wave of firearms enthusiasm for all it's worth.

    This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.