Can Gun Stocks Emerge From The Slump Post Florida Shooting?

The U.S. gun industry has been going through a rough patch since 2016 with companies reporting declining sales figures. The slump in shares stemmed from the election of Donald Trump in 2016, who, as a Republican incumbent, perceived to be softer on gun laws. This has certainly affected the sale of guns thus resulting in lower profits and job cuts.

Whether President Trump’s surprise embracing of gun control on live television on Feb 28, 2018, and push for renewing gun safety legislation will reshape the industry remains to be seen. This is more so because Senate Republicans sounded neither convinced nor interested in Trump’s gun control ambitions.

Trump’s Election Triggers Decline

The gun industry has been witnessing a steep decline in both sales and profits since the election of Trump in 2016. And the reasons are obvious. Trump is a Republican endorsed by the National Rifle Association (NRA).

Major gun manufactures have reported weak sales in their recent earnings releases. Sturm, Ruger & Company, Inc.’s (NYSE:RGR) fourth-quarter 2017 adjusted earnings of 56 cents per share missed the Zacks Consensus Estimate of 62 cents by 9.7%. Firearm sales (comprising 99.1% of total sales) decreased 21.4% in 2017 and castings sales declined 22.7%. Also, the company said that it cut 700 jobs last year. (Read: Sturm, Ruger Misses Q4 Earnings, Beats Sales Estimates)

The gun manufacturing industry enjoyed strong sales during the regime of Barrack Obama, and even during the presidential campaign between Democrat candidate Hillary Clinton and Trump. The industry also generated huge job growth during this period. According to the National Sports Shooting Foundation, between 2008 and 2018, the gun industry grew from 166,000 employees to 301,000. Wages too grew from $6.4 billion to $15.2 billion.

Things started changing post Trump’s election. During Obama’s regime, sale of guns, in particular semi-automatic rifles, would often be driven by mass shootings. But with Trump as President, that too seems to have come to a halt.

However, gun stocks witnessed a momentary jump after Trump spoke on tightening background checks for guns in response to the recent high school massacre in Florida. This saw shares of American Outdoor Brands Corporation (NASDAQ:AOBC) and Sturm, Ruger rally the very next day, on Feb 22. Shares of Sturm, Ruger increased 3.6%, while American Outdoor Brands jumped 7.9%, before ending with an increase of 0.6%.

Record Decline Follows Florida Shooting

In fact, Trump’s comments were seen as increasing the chances of more curbs on gun ownership, thus giving a momentary sales boost. Analysts on the other hand believe that what Trump has been saying is quite surprising.

The rally in stocks did not last long and despite Trump telling state governors on Monday that "we have to have action" in the wake of the latest U.S. mass shooting and urging them not to be "afraid" of challenging the NRA, gun stocks continue to decline.

Shares of Strum, Ruger and American Outdoors have plunged 18.7% and 24.56%, respectively. The decline has been the steepest than it was after past shootings. Then again, shares of Vista Outdoors Inc. (NYSE:VSTO) have rallied 13.73% in the last 30 days. Understandably, Trump’s comments haven’t been followed by concrete action and sales seem to be declining, given that strong gun control doesn’t seem to be high on Congress’ agenda.

Meanwhile, shares of Dick’s Sporting Goods, Inc. (NYSE:DKS) , which sells guns along with a wide range of sports gear, have increased 1.78% in the last 30 days. Also, on Feb 28, 2018, Dick’s Sporting Goods announced that it would no longer be selling assault-style rifles and high-capacity magazines. It is at the same time opting not to sell any kind of guns to anyone under the age of 21 years. Dick’s Sporting carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, though unexpected, Trump’s comments on “writing out” use of bump stocks and fighting the gun lobby, post the Florida shooting saw the sale of guns increasing. This too was short-lived. Although Florida Governor Rick Scott and Senator Marco Rubio have said that they are planning to raise the minimum age of buying a gun from 18 to 21, Republican politicians still don’t have a concrete agenda in place.

Moreover, Scott has also hinted that a ban on bump stocks hasn’t helped the industry much. Since Feb 15, 2018, a day after the shooting, shares of Vista Outdoors have declined 12.81%, while Strum Ruger, Dicks Sporting and American Outdoor Brands Corporation have plunged 14.07%, 4.84% and 16.2%, respectively.

Buck Stops for Gun Stocks

The U.S. gun industry isn’t in its best phase, with both sales and profits declining since Trump’s election. Given that Republicans are softer on gun-control laws, even incidents like Florida shooting haven’t impacted the sale of guns much. The initial rally after Trump’s comments on writing out the use of bump stocks, didn’t last long with most companies reporting sharp decline in sales. Also, his latest gun control plea did not appeal to the Senators, leaving doubts over any change in the industry’s prospects.

Analysts believe that gun investors, which comprise a large number of military veterans and gun enthusiasts, might still continue with their long-term investments in the industry, while institutional investors seem to have somewhat lost their appetite for it. That said, the backdrop certainly calls for a cautionary approach toward gun stocks, at least for the short term.

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