Gun Ban Could Actually Be a Boon for Weapons Manufacturers

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Gun appreciation day
On Saturday, a coalition of "gun rights and conservative groups" intends to hold the first nationwide "Gun Appreciation Day" in America. If all goes according to plan, Americans will "show their support for gun ownership by turning out en masse at gun stores, ranges, and shows from coast to coast."

The timing's not coincidental. According to a press release announcing the event, the aim here is to "send a message to Washington two days before Obama's second inauguration." And in case there was any doubt whom the organizers aim to influence, event chairman Larry Ward, president of Republican consulting firm Political Media, declares: "The Obama administration has shown that it is more than willing to trample the Constitution to impose its dictates upon the American people."

Notable No-Shows

So far, Gun Appreciation Day has attracted a range of sponsors, including the Second Amendment Foundation, Citizens Committee for the Right to Keep and Bear Arms, Special Operations Speaks, Revolution PAC, Citizens and Country, Social Security Institute, Committee to Draft Judge Andrew Napolitano, Conservative Action Alerts, Women Warriors PAC, Conservative Action Fund, and Political Media.

Notably absent from the list: the National Rifle Association.

Also noteworthy for its absence is a group that, in theory, would have the most to lose from tightened gun regulation: the gun makers.

The world is full of gun manufacturers, from Forjas Taurus in Brazil to Beretta and Glock in Europe to the Freedom Group (owned -- for the time being, at least -- by private equity fund Cerberus Capital) in the United States to Browning Arms, based in the U.S. but owned by Groupe Herstal in Belgium. But so far, not one of these makers of pistols, revolvers, shotguns, bolt-action or semiautomatic rifles has agreed to take part in Gun Appreciation Day.

They may simply be playing duck-and-cover from the political firestorm that's erupted after Aurora and Sandy Hook. But there's another possibility to consider as well -- the possibility that tightened regulation on gun sales may not be altogether bad news for the industry after all.

The Unintended Consequences of Laws

In "Glock: The Rise of America's Gun," his work on the recent history of the American gun industry, author Paul Barrett notes that "for the gun industry, and especially Glock, [President Clinton's 1994] assault weapons ban turned out to be far more notable for its unintended consequences than for its goal of restricting the spread of semi-automatic firearms."

We've all seen in recent weeks the stories about how threatened action on gun control has sent Americans flocking to gun stores to stock up on guns and ammunition "before they're all banned."

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That happened in 1994 as well, and it was only one side effect of the 1994 assault weapons ban. According to Barrett, at the same time as Glock sold pre-ban handguns hand over fist in the lead-up to regulation, it also profited by buying back high-capacity clip "trade-ins" from Glock owners after the law went into effect, and resold them used (often at prices even higher than they fetched when brand new) -- which was permitted under the law.

Meanwhile, the restrictions on the sale of these same large-capacity clips spawned an entire new category of "pocket pistols."

Forbidden to sell handguns with 17-round clips, for example, gun manufacturers simply invented -- and then touted as convenient "concealed-carry" weapons -- new smaller handguns that held only six, seven, or perhaps 10 rounds. And proceeded to sell the heck out of them.

Sales Growth That's Faster Than a Speeding Bullet

Because two major gun manufacturers -- Sturm, Ruger and Co. (RGR) and Smith & Wesson (SWHC) -- are publicly traded and therefore must publicly report their financial results, we can examine their records from the time to see how tightened gun regulation affected the rest of the industry.

Financial details on both companies are available for the latter portion of the period covered by the 1994-2004 Assault Weapons Ban. In the case of Ruger, the ban does appear to have had an effect, in the form of a 31 percent decline in sales from 1998 to 2004. And yes, the lapse of the ban helped Ruger grow its sales 25 percent between 2004 and 2008. So far, this is as you'd expect. But now consider the case of Smith & Wesson.

Smith &Wesson's public financials only go back to 2002, but even that's far enough to show us that from 2002 to 2004 -- years when the ban was still in full effect -- the company's sales nonetheless increased 50 percent. After the ban was lifted in 2005, when you'd expect to see pent-up demand result in strong sales, sales grew a mere 5.3 percent (before taking off again in 2006 and beyond).

The Upshot

None of the above should be taken as suggesting that gun regulation is good, or that guns are bad -- or vice versa. What it does suggest is that whatever laws come out of Congress in the next few weeks or months, so long as there's a demand for the product, gun companies will find a way to work within (or work around) the new legal regime.

Daily Finance Midday Market Minute 01/17/13

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Sturm, Ruger & Company.

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