Weak Gun/Ammunition Sales Might Create Buying Opportunity

Weak Gun/Ammunition Sales Might Create Buying Opportunity

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

This morning, the outdoor sporting goods retailer Cabela's reported earnings. The company had a killer quarter, in which its earnings per share increased 16.7%, at $0.70, higher than last year's $0.60 during the same quarter. The increased profit came on the heels of 14.8% higher revenue, quarterly comparable-store sales up 3.9%, and increased gross margins on merchandise, which is now at 37.3%. The comparable-store sales increase was the eighth consecutive quarter the company managed to beat its previous mark and would have been an increase of 5.3% when gun sales are backed out.

Yes, you read that correctly! If gun sales are backed out, same-store sales would have been 5.3%, not the 3.9% Cabela's reported. While ammunition sales were slightly higher during the quarter than last year, firearm sales meaningfully weakened during the quarter. While Cabela shareholders didn't seem to mind the news as shares closed the day higher by 0.35%, other companies didn't fare so well on the news.

Shares of gun makers Smith & Wesson and Sturm, Ruger & Co. fell hard on the news. Smith & Wesson lost 2.71% today while Sturm, Ruger lost 6.09%. Both companies rely on gun sales for nearly all of their revenue and since neither company has reported quarterly earnings to coincide with Cabela's results, shareholders pushed share prices down.

But today's move may be good news for those looking to buy cheap stocks at even cheaper prices. The move we experienced with shares of Smith & Wesson and Sturm, Ruger were very quick responses to comments that could potentially have zero impact on these companies' actual performance. Cabela's simply stated that firearm sales were down during the quarter, not which manufacturers sold fewer guns than in previous quarters. Additionally, this quarter's move shouldn't have come as a big surprise since in the past gun sales were driven by the fear that tougher regulation would be imposed, not something we really heard about this most recent quarter.

After today's decline, shares of Smith & Wesson are trading at only 8.23 times past earnings and 8.07 times future expected earnings. That is not too bad for a company that recently experienced quarterly revenue growth of 25% and quarterly earnings growth of 48%. And on top of that, shares are only up a little more than 11% over the past 52 weeks, meaning if revenue and earnings growth continue at their current pace, shares may really take off.

While Sturm, Ruger shares aren't as cheap as Smith & Wesson's, there may still be value after today's decline. The stock currently trades at 13.48 times past earnings and 16 times future expected earnings. While that would indicate analysts don't believe it can continue its recent 79% quarterly earnings growth figure or its 50% quarterly revenue increase in the future, lower sales have already been priced into the stock and analysts certainly have been warning investors. So the comments from Cabela's today shouldn't have surprised investors. Thus the 6% move lower was certainly overblown and allows savvy investors who were waiting for the market to irrationally misprice a stock a good buying opportunity.

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Fool contributor Matt Thalman has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published