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Bear of the Day: Sturm Ruger (RGR)

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Sturm, Ruger & Company, Inc. (RGR - Free Report) is facing tough times under President Trump. This Zacks Rank #5 (Strong Sell) has seen sales and earnings decline by the double digits in 2017 due mostly to politics.

Sturm, Ruger is one of the largest firearm manufacturers in the US. It makes 400 variations through 30 product lines.

Sales Drop Big in the Second Quarter

On Aug 2, Sturm Ruger reported second quarter results and missed big on the Zacks Consensus Estimate. Sturm Ruger reported $0.57 compared to the Zacks Consensus of $1.11. That's a miss of 49%.

Net sales fell 22% to $131.9 million from $167.9 million a year ago.

If you recall, 2016 saw stronger-than-normal demand during the Presidential election cycle due to fears by gun enthusiasts that Hillary Clinton would win the White House and put gun restrictions on buyers. Remember, this was the same fear that emerged in 2008 after Barack Obama won.

The 2008-2016 period resulted in record gun sales.

Since Trump won in November 2016, sales have fallen.

The estimated unit sell-through of Sturm Ruger's products from the independent distributors to retailers decreased 13% in the first half of 2017 compared to the first half of 2016. For the same period, the National Instant Criminal Background Check System saw a 7% decrease in background checks.

Retailers have also been reducing inventories and trying to generate cash for the typically slower summer season.

The gun sales slowdown is impacting the entire industry which has also resulted in Sturm's competitors applying sharp price discounting and offering lucrative consumer rebates.

Estimates Being Cut

There's no reason to think that gun sales are dramatically going to turn around any time soon. The analysts have been cutting 2017 and 2018 estimates as a result.

The 2017 Zacks Consensus Estimate has fallen to $3.69 from $4.37 just 90 days ago. It made $4.59 in 2016 so that's an earnings decline of 19.6%.

2018 is expected to be a bit better than 2017, but estimates have been cut there in the last 3 months to $4.17 from $4.63.

Shares Sink 7.6% in 2017

It's been a roller coaster ride over the past 2 years and right now, shares are on a downward slide.

But they're now pretty cheap, with a forward P/E of just 13.1.

Additionally, Sturm continues to pay a dividend, which is yielding 1.9%. As of July 1, its cash totaled $44 million and it had no debt.

But with earnings estimates being cut, this appears to be a value trap instead of a value play.

The entire industry is in the same predicament including American Outdoor Brands (AOBC - Free Report) , formerly known as Smith & Wesson. Its shares have also sunk but it remains a Zacks Rank #3 (Hold.) It reports earnings in September 2017.

Investors might be wise to wait for a turnaround in sales before jumping in.

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