Bursting U.S. gun bubble begins to take victims

February 26, 2014

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Fear of gun legislation following the Sandy Hook School shooting drove U.S. demand for guns to absurd heights. It’s increasingly clear that laws won’t be tightened. Gunsmith Sturm Ruger is the first to admit the emotion that fired up the bottom line has run its course. The reckoning will be painful.

The Connecticut-based maker of rifles, semi-automatics and pistols had fine results for the fourth quarter, with sales rising 28 percent from the same period last year. But the company said demand last year had been driven by “fear and uncertainty.” The Newtown massacre in December 2012 created the perception that stricter limits on ownership were coming, sparking prospective buyers to stockpile. The week following the shootings set a record for background checks – the best indicator of future sales.

That barometer is now pointing in the opposite direction. There were 1.7 million background checks performed in January – a third fewer than in the same month a year ago.

Sturm Ruger thinks demand has now fallen to more rational levels. Retailers with $25,000 credit lines are no longer attempting to order $100 million of weapons, according to the company’s chief executive. The head of outdoor retailer Cabela’s agrees. Earlier this month, Thomas Millner referred to last year’s demand as a bubble, saying “the surge in firearms and ammunition is clearly winding down.”

History suggests demand still has a long way to fall. Though lower than in the previous year, the number of gun checks in January was about double what had been typical in the years before the Obama presidency. Moreover, well-maintained firearms can last a lifetime, and the percentage of American homes owning a gun continues to decline.

The investment community seems to judge this is a temporary blip. Though shares of Sturm Ruger and Smith & Wesson are both down about 15 percent this year, both stocks have still tripled over the past three years. Sturm Ruger’s 2015 sales are still forecast by analysts to be higher than last year. Sturm Ruger seems less convinced. It has paid out about three-quarters of the cash it has earned over the past three years, through rising and special dividends. It just cut its dividend to 54 cents from 58 cents.

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