Gun Industry News – 1

We are going into what stock analysts call earnings season. This is when public companies announce their earnings for the quarter and either meet or surpass expectations or fail to meet the projections of analysts.

Olin Corporation announced their earnings yesterday. In addition to their chlor alkali and other chemical businesses, Olin owns Winchester ammunition. Olin lost $37.9 million or 23 cents per share mostly due to restructuring costs for their chlor alkali business. This loss was considered an $80 million miss on expectations.

However, for what concerns us, the Winchester division had improved results.

Winchester sales for the first quarter 2016 were $183.7 million compared to $156.7 million in the seasonally weaker fourth quarter 2015, with growth driven primarily by increased shipments to commercial customers. First quarter 2016 segment earnings were $28.7 million compared to $21.8 million in the fourth quarter 2015. The increase in segment earnings reflects higher commercial shipments and lower commodity and material costs. Winchester first quarter 2016 results included depreciation and amortization expense of $4.6 million compared to $4.9 million in fourth quarter 2015.

Olin stock closed up 33 cents for the day with a final closing price of $22.17. This is up about $10 from the low earlier this year.

Olin had their earnings call with stock analysts today. You can see their Powerpoint presentation here. President and CEO John Fischer had this to say about their Winchester division:

I’d like now to turn to the performance of our Winchester segment, which we summarize on slide eight. Winchester sales in the first quarter were $183.7 million, a 17.2% increase over the seasonally weaker fourth quarter of 2015. This growth was driven primarily by increased shipments to commercial customers. We’ve seen improvement in commercial demand in selected handgun calibers and steady strength in rimfire demand.

First quarter 2016 adjusted EBITDA was $33.3 million, a 24.7% increase over the fourth quarter of 2015. The improved results reflect higher commercial shipments and lower commodity and material costs. We are forecasting sequential adjusted EBITDA improvement in the second quarter for Winchester with continued strong commercial demand, especially in pistol and rimfire ammunition, and lower operating cost.

Winchester continues to focus on cost reduction and we remain on track to complete the final equipment relocation during the second quarter of 2016. We anticipate that the annual cost savings from this project will reach $40 million.

As a result, we believe full year 2016 Winchester earnings will improve compared to 2015, primarily because of incremental savings from the Oxford relocation, lower commodity and material costs, and improvement in volumes, partially offset by lower prices.

Improved commercial demand for handgun and rimfire ammo sounds like Gun Culture version 2.0 is making an impact. An editorial today by Jim Shepherd in The Outdoor Wire speculates version 2.0 may be giving way to version 3.0. Either way, the improved sales of ammo by the Winchester Division certainly benefits from it.

Note: In full disclosure, I own shares in Olin Corporation. Nothing here should be taken as investment advice to either buy or sell the stock.

Ammo Sales Are Up At Winchester

Olin Corporation released their second quarter 2015 results yesterday. I doubt anyone who reads this blog cares what they made on their sales of chlor alkali and caustic soda. However, their results from their Winchester division are interesting.


Winchester second quarter of 2015 sales were $194.2 million compared to $181.0 million in the second quarter of 2014. The increase in second quarter of 2015 sales compared to the second quarter of 2014 reflects increased shipments to commercial, law enforcement and military customers. Winchester’s second quarter 2015 segment earnings were $33.9 million compared to $33.1 million in the second quarter of 2014. The increase in segment earnings reflects the impact of lower commodity and material costs and lower manufacturing and other costs, partially offset by a less favorable product mix.

As I read this, and I’m not an accountant, both their gross sales and net revenues from ammo sales are up. However, their net margins have dropped from 18.29% in 2014 to 17.04% in 2015. Given that they have lower commodity/material costs combined with lower manufacturing costs in 2015, the fact that their net margins have dropped would be something I’d want to keep an eye on.

I’m thinking that either Walmart is really pushing them on price or that push is coming from their governmental bulk sales. This is all just a guess on my part.

Early Morning Fire At Winchester’s East Alton Plant

There was a fire in the early hours of the morning at Winchester’s East Alton, Illinois ammunition plant. Fortunately, it seems that only a maintenance shed was destroyed and the fire did not spread to other areas of the plant.

From the St. Louis Post-Dispatch:

An early-morning blaze and propane explosion at an ammunitions factory in East Alton was contained to a maintenance shed and caused no injuries, according to police.

A motorist spotted fire in a maintenance shop at the Winchester Ammunition plant, which is a division of Olin Corp., and called 911 about 3:15 a.m., according to East Alton Fire Chief Randy Nelson.

Reports vary as to when the fire was first spotted but it was finally extinguished around 7:30 this morning. The blaze caused propane cylinders to explode and steam lines to rupture from the intense heat.

More on the fire from St. Louis station KMOV:

You can see the morning after pictures in this report from Fox 2 St. Louis:

Winchester has been in the process of moving its center-fire ammunition production from the East Alton plant to its much newer plant in Oxford, Mississippi. Winchester started this move in mid-2010. Rimfire ammunition was moved to Oxford earlier.

 Olin Corporation, the parent of Winchester, has not made any official statement on the fire that I can see on their website. Given that it happened on a Sunday morning, this is not too surprising.

Investing In Guns And Ammo

With the SHOT Show having just concluded this past week, I thought it might be a good time to look at investing and the gun industry. As NSSF President Steve Sanetti noted in his State of the Industry address at the SHOT Show, the $4.1 billion firearms and ammunition industry is one of the bright spots in the economy.

Eighteen consecutive quarters of sales growth, as evidenced most recently by an all-time high number of mandatory point-of-sales background checks in December, and during the worst recession since the great depression, would be an enviable feat for any industry. Yet we have achieved it…

If, like most investors, you are saying to yourself that you’d like to invest in an industry that is actually doing well in our poor global economy, when it comes to the firearms industry there are very few choices available. The reason is that much of the industry is in private hands and are not public companies. By public companies, I mean those whose stock trades on a stock exchange.

As I noted, much of the firearms industry is in private hands. Companies such as Groupe Herstal (FNH, Browning, and Winchester firearms), Colt, Beretta, Steyr Mannlicher, and the Freedom Group (Remington, Bushmaster, DPMS, Dakota Arms, Marling, H&R, etc.) are all privately held. While the Cerberus-owned Freedom Group may eventually go public, they pulled their Initial Public Offering back in April 2011.

So where does this leave investors?

In the United States, Sturm, Ruger and Company (RGR) and Smith and Wesson Holding Company (SWHC) are the only two publicly traded firearms manufacturers. Worldwide, you can add Forjas Taurus (Taurus firearms) which trades on the Sao Paolo exchange, Manroy PLC (Sabre Defence and military arms) in the UK, Metal Storm Ltd. of Australia, and a handful of Russian companies like Tula Armory.

Ammunition companies in the United States that are publicly traded include Olin (Winchester ammunition) and Alliant Technologies (Federal, CCI, and Speer). Other companies that are involved in the broad firearms and outdoor market would include Cabelas (CAB), the Outdoor Channel (OUTD), and Taser International (TASR).

Let’s look a little closer at the two US firearms manufacturers and the two ammo companies.

Sturm, Ruger and Company (RGR) is headquartered in Southport, Connecticut and has factories in Prescott, Arizona and Newport, New Hampshire. Its stock trades on the New York Stock Exchange. In terms of market capitalization, Ruger is larger than Smith and Wesson – $736 million versus $309 million – but has about $100 million less in annual gross revenues. Ruger has been doing well and is on track to become the first firearms manufacturer to sell one million firearms in a one year period. The stock has also been doing well as can be seen in the chart below. Over the last two years, Ruger’s stock price has risen 250% and it closed at $38.68 per share on Friday. Looking at the chart, you can see that it significantly outperformed the Standard and Poor’s 500 Index.

Smith and Wesson Holding Company (SWHC) is headquartered in Springfield, Massachusetts. They moved their Thompson Center manufacturing to Springfield from New Hampshire. Smith and Wesson also has non-firearms operations in Houlton, Maine and Franklin, Tennessee. The company is also a leading manufacturer of handcuffs and provides physical security products through their Security Solutions division. As noted above in the discussion Ruger, Smith and Wesson has a smaller market cap than Ruger but has about $100 million more in annual revenues. However, when it comes to profitability, Ruger both has a higher profit margin and more profits than Smith and Wesson. The stock price of SWHC reflects this. It closed on Friday at $4.74 per share and is only up about 20% for the last two years. Looking at the chart, you can see its stock price has been very volatile.

Neither of the U.S. ammunition manufacturers, Olin and Alliant Technologies, are solely ammo makers. Olin also makes chlor alkali products which are basic materials used in other industries. Alliant Technologies is a large defense contractor involved in aerospace and missile technologies, armament systems, and small arms ammunition manufacturing for the military.

Olin (OLN) has making powder and ammunition for over 100 years from its beginnings with the Equitable Powder Company and Western Cartridge in East Alton, Illinois. Olin bought Winchester out of receivership in 1931 and has owned it ever since. They spun off the Winchester Arms division to U.S. Repeating Arms in 1981. Currently headquartered in the St. Louis suburb of Clayton, Missouri, they make Winchester ammunition in East Alton, Illinois; Oxford, Mississippi; and Geelong, Australia. Olin has been moving more and more ammunition production from East Alton to Oxford due to union-management issues and a more modern facility. In terms of market capitalization, Olin is valued at $1.7 billion, has gross revenues of $1.9 billion, and net income of $225 million. Its stock closed at $22.20 per share on Friday and it trades on the New York Stock Exchange. Olin’s stock price has been volatile over the last two years but it has outperformed the S&P 500 growing 30% in value over the period.

As I noted earlier, Alliant Technologies (ATK) is a major defense contractor. The civilian ammunition component of their business comprises only about 20% of their overall business. Their Security and Sporting Group is comprised of Federal Premium ammo, CCI ammo and components, Speer bullets and ammo, RCBS reloading equipment, Alliant Powder, Champion ammo, Weaver optics, Eagle Industries, and Blackhawk! Industries.Alliant Technologies is headquartered in Arlington, Virginia and has 60 facilities in 22 states, Puerto Rico, and internationally. ATK has a market cap of $2.04 billion, has gross revenues of $4.62 billion, and net income of $292 million. Its stock closed at $61.78 per share and it trades on the New York Stock Exchange. As can be seen from the chart below, it has underperformed the market for the last two years and its stock price has lost 30% of its value.

Of the four companies, Ruger is the purest play in firearms. While the company does own Pine Tree Castings, it only provides about 1% of their revenues. The other three companies are more diversified. This diversification which in normal times would help them seems to have depressed their growth as compared to that of Ruger. With other sectors of the economy not having the robust growth of the firearms industry, this has hurt Smith and Wesson, Olin, and Alliant Technologies.

Because of my day job, I am not permitted to make any recommendations. I suggest that you do your own research, check with your own investment advisor, and go from there if you are interested in investing in the companies of the firearms and ammunition industry.

Disclosure: In the spirit of full disclosure, I own shares in RGR, ATK, OLN, and SWHC. Nothing here should be taken as an investment recommendation nor a solicitation of your business.

Winchester Plans Moving Center-Fire Ammo Plant

According to stories in the St. Louis Post-Dispatch and the Alton, IL Telegraph, the Winchester Ammunition division of Olin Corporation is exploring plans to move their East Alton, IL center-fire ammunition plant to Oxford, Mississippi. Winchester had moved their rimfire ammunition production to Oxford in 2004.

Managers announced the plans to workers last Thursday (August 5th). At stake are about 1,000 jobs. According to statements from the River Bend Growth Association, Winchester is the area’s largest employer with about 1,700 employers. The move, if Winchester goes ahead with it, would be completed over three to five years.

Two factors that may be behind the move are Olin’s property tax dispute with Madison County, Illinois and the need to lower labor costs.

One of the factors driving Olin’s decision may be its Madison County property tax. The corporation has appealed its East Alton facilities’ assessed value each year since 2003, said Kerry Miller, chairman of the Madison County Board of Review.

Last year, the Board of Review, which hears property assessment appeals, put the company’s property value at $36 million. Olin’s appraisers, however, put the market value of its property at $17 million. Olin has appealed the Review Board’s valuation, and it is pending in Illinois’ appellate court, Miller said.

Labor costs would probably be lower for Winchester in Mississippi than in East Alton. The workers at the East Alton plant are represented by the International Association of Machinists and Aerospace Workers District 9.While not explicitly stated in either story, it seems to be understood that the Mississippi plant is non-union.

Neither the mayor of Oxford, MS nor the Mississippi Development Authority would not say anything more than they work “to retain and support existing businesses”. Illinois officials were not so reticent.

State Sen. William Haine, D-Alton, said he got a call about the potential move from one of the company’s lobbyists the day before the announcement. He said he is not sure what motivated the decision.

“I’m shocked, to tell you the truth,” he said. “I thought they were making money there.”

The state could look at some kind of tax abatement for the company’s facilities in Alton, but “there isn’t any pot of money in Springfield to hand over to anyone,” Haine said.

“We don’t know how to proceed as a state,” he said. “It’s pretty hard to assemble an incentive package when we don’t know what’s driving their decision. And B, it’s evident the state of Illinois doesn’t have any money.”

And from the Mayor of East Alton to the Telegraph:

East Alton Mayor Fred Bright said it would hurt his community, but his experience with the company shows that is not a major concern for management.

“Olin cares for nothing but Olin, itself,” Bright said.

Mayor Bright’s attitude sounds real helpful in attempting to keep his city’s largest employer. At least State Sen. Haine is realistic enough to realize that the State of Illinois doesn’t have the money to pay them to stay.

Winchester has had a presence in East Alton since 1892 when the Equitable Powder Company was founded there by Franklin W. Olin. Ammunition production began in 1898 with the opening of the Western Cartridge plant.

UPDATE: Sam Pierce of the Illinois Review gives more perspective on Winchester’s plans to move. He worked in the Engineering Dept of Winchester for almost 10 years at the East Alton plant. After reading his piece, I’m surprised that Olin didn’t move the plant years ago.