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Dividend Investing Ideas Center

An Unlikely Driver in the Soaring Firearm Market

Calder Lamb Jul 31, 2015


Guns. While there are conflicting views on U.S. firearm policy and law, what is clear is that the amount of new firearms entering U.S. circulation is at an all-time high. Strangely, the percentage of households that own a firearm has steadily decreased over the last 10 years. As investors we need to know what is driving the large number of firearm purchases in the U.S. and formulate a strategy that profits from this trend.


Violent crime and terrorist threats are the knee-jerk answer to what drives the population to buy guns, however, both of these factors have been in sustained declines since 2001. Instead, an unlikely but sustainable force seems to be driving the upward trend in gun manufacturing: women.


According to The Economist’s blog, the overall percentage of American households who own a gun is falling, but the total number of guns in circulation is at an all-time high. The divergence between gun ownership percentage and new guns entering circulation suggests that existing gun-owning households are buying more guns than ever before. The increase in the number of new guns entering circulation correlates with an increase in overall firearm production in the U.S.


Gun Production


According to ATF data, firearm manufacturing in the United States is near historically high levels, with pistols and rifles constituting the majority of new guns on the market. The number of pistols manufactured doubled between 2005 and 2010. Pistols are usually designed for personal protection, which suggests that the dramatic increase in new guns entering circulation can be explained by an increased need for personal security. Historically, the two major threats to personal security have been terrorism and crime.


Terrorist Threats


Data compiled by the RAND Corporation, shows that international terrorist attacks against the United States have been declining since their peak in 1991, and domestic terrorist attacks have been declining since 2001. While there was a significant spike in attacks after 2000, including 9/11, the downward trend in both international and domestic terrorist attacks has continued. If terrorism is not the major cause of the historically high numbers of guns entering circulation, then it must be crime.


Violent Crime


According to FBI data, violent crime rates have declined by over 12% in the past five years. Indeed, violent crimes in all categories have fallen significantly in the last 25 years. From this data, it is clear that violent crime is not a significant driver of the recent increases in guns entering circulation. So if the increases in firearm purchases are not due to an increased threat of violent crime or terrorism, then what is causing the historically high rates of gun purchases?


An Unlikely Driver: Women


A recent report by the National Shooting Sports Foundation, or NSSF, provides a surprising answer: a dramatic increase in women gun owners. According to the report, “female engagement in target shooting grew 60 percent to 5.4 million participants between 2001 and 2013.” Additionally, the report highlighted that, “the most commonly owned firearm by women in the study is a semiautomatic pistol.” These facts match up closely with firearm manufacturing and gun ownership data, suggesting women have been the major contributor to record-breaking firearm sales.

As an investor, it is important to differentiate between a lasting trend and an event-driven spike. An event-driven spike may provide a good entry or exit for a trade, but rarely provides the sustained trend required for a profitable long-term investment. There is clearly an upward trend in firearm purchasing and manufacturing that is not being caused by increases in violent crime or terrorist attacks. The NSSF report provides compelling evidence that the increase in women buyers of guns is the driving force for the upward trend in firearm manufacturing and new guns entering circulation. There is little reason to believe that this trend will slow as the majority of women still do not have firearms and may yet hop on to the trend. Investors can take advantage of this trend in a few different ways depending on their personal risk tolerance and diversification requirements.


Highlighted Assets in the Security Space


Sturm, Ruger & Co., Inc. (RGR ) is one of the nation’s leading manufacturers of firearms for the commercial sporting market. The company is the only full-line manufacturer of American-made firearms. Ruger has been operating for over 60 years. The company does not have a stable dividend trend, however, dividends increased from $0.2 on a quarterly basis in 2000 to $0.32 on a quarterly basis in 2015.

Firearm Trend Impact:

The stock price for Ruger will directly benefit from the continued trend of women buying firearms. The stock represents the only pure firearm manufacturing play that pays a dividend. Women’s impact on the sector is not finished and Ruger will continue to benefit.

Business Divisions:

Firearm Manufacturing


National Presto Industries (NPK ) – The company manufactures a variety of products across three major segments: housewares, defense, and absorbent products. In the housewares segment NPK manufactures small kitchen appliances such as waffle irons and pizza ovens. In the absorbent segment, it primarily manufactures adult diapers, and in the defense segment the company manufactures ammunition, smoke grenades, and launchers.

Firearm Trend Impact:

Compared to the others on this list, National Presto Industries is a small company. However, it is well positioned to benefit from the upward trend in firearms due to its heavy exposure in non-lethal weapons and ammunition manufacturing. The company is strongly correlated with Ruger, a pure play in the space, which suggests NPK will continue to benefit from a continued upward trend in firearms.

Business Divisions:

Housewares and Small Appliances
Defense Products
Absorbent Products


Olin Corporation (OLN ) – Olin Corporation has three major segments: chlor alkali products, chemical distribution, and Winchester. Chlor alkali is an industrial chemical used in the creation of chlorine and sodium hydroxide. These products are essential for manufacturing myriad products and processes, from fracking to plastic wrap. Further, Olin’s Winchester produces ammunition for all types of firearms. The company has paid $0.2 as a dividend every year on a quarterly basis for the past 15 years.

Firearm Trend Impact:

The stock prices of Olin will benefit from a continued upward trend in firearm purchases. Simply, more guns means more ammunition used. However, the company’s exposure to the trend in firearms is muted by its diversification in the chemical distribution and chemical manufacturing branches which are unrelated to the trend.

Business Divisions:

Chlor Alkali
Chemical Distribution
Winchester


Allegion PLC (ALLE ) is a conglomerate of brands that specialize in mechanical and electronic locks. Whether it’s a key lock, electronic scanning lock or a biometric scanning lock, Allegion probably had a hand in its production. The company only recently started paying a quarterly dividend in 2014.

Firearm Trend Impact

Allegion PLC’s stock price may benefit from the firearm trend, after all, most firearms require a lockable gun safe. Unfortunately for Allegion, multiple firearms can be stored in one safe, which means that an increase in same household guns will not necessarily mean more gun safes. But it is possible that an increase in firearms could lead to an increase in portable gun safes, which would positively impact Allergion’s bottom line.

Business Divisions:

Business
City
Home


Stanley Black & Decker, Inc. (SWK ) – SWK provides power and hand tools, mechanical access solutions, and electronic security and monitoring systems. The construction & DIY segment provides professional-grade electric power tools as well as power tool accessories. The industrial segment offers custom pipe welding and pipeline inspection services, and the security segment provides security equipment and monitoring services such as automatic doors, alarm monitoring and video surveillance. The company has a consistent track record of growing dividends for the past 15 years.

Firearm Trend Impact:

Stanley Black & Decker, Inc. is unlikely to directly benefit from a continuing upward trend in firearms. While women buying firearms does increase general security awareness and independence, it is unlikely that these benefits will have a significant effect on SWK’s bottom line.

Business Divisions:

Construction & Do-It-Yourself
Industrial
Security


ADT Corp. (ADT ) – ADT is the largest company in the home security business in the U.S. and Canada. The company has been in business for over 140 years and has 6.4 million customers.

Firearm Trend Impact:

ADT International is a home, life and fire security and monitoring company, which means that general crime levels are directly related to the profitability of the company. Considering that violent crime levels have been steadily falling, it is unlikely that the trend of women buying more firearms will have a long-term positive impact on the ADT’s stock price.

Business Divisions:

Home Health
Business Security
ADT Pulse Automation Solutions
Home Security


FLIR Systems (FLIR ) – FLIR Systems designs, manufactures, and markets thermal imaging, visible-light imaging, and threat-detection solutions worldwide. These devices have a wide range of applications, from personal protection products like weapon-mounted thermal imaging systems, to intelligent traffic systems in cities. FLIR started paying a dividend in 2011 and has increased it to date.

Firearm Trend Impact:

FLIR is unlikely to benefit from the upward trend in firearm purchases, due to the fact that many of the new entrants into the market are unsophisticated and have little need for night vision goggles or thermal imaging systems. These are advanced and expensive technologies that are mainly utilized in warfare situations, rather than target shooting.

Business Divisions:

Surveillance Segment
Instruments Segment
OEM and Emerging Markets Segment
Maritime Segment
Detection Segment
Security Segment


Tyco International (TYC ) – Tyco is the world’s largest pure-play fire and security company. They specialize in property monitoring and protection across all global markets. Tyco has paid dividends since 2000.

Firearm Trend Impact:

Tyco is similar to ADT in that it is a home, life and fire security and monitoring company, and like Tyco it is unlikely that the current trend of women buying more firearms will have a long-term positive impact on the company’s stock price. The stock is actually negatively correlated with Ruger, which is the purest play in the space, suggesting that Tyco is actually negatively impacted by the trend.

Business Divisions:

Fire Protection
Security
Life Safety


The Bottom Line


Investors can take advantage of the upward trend in firearms manufacturing by paying attention to those companies that the trend positively impacts.


Image courtesy of worradmu at FreeDigitalPhotos.net

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