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After a dismal 2005, which saw Sturm, Ruger & Company completely cut its dividend and report three quarterly losses in a row (2Q05-4Q05), RGR posted a $1.4 million profit in 1Q06. While profits and more than $4 million in free cash are, ordinarily, not a bad thing, it is worth pointing out that these are not ordinary times: 1Q06 was the weakest opening quarter for RGR in at least a decade. This could be an ominous signal given that the first quarter is historically the company’s strongest.
With 1Q06 in mind, not only is there no evidence that the company will declare any dividends soon, but there is reason to believe that in 2006 RGR could report is first annual loss since the company was founded in 1949. This news has negatively impacted our near-term outlook for the company.
“Ideally an investment in RGR would be best before, and if, the company renews its dividend. However, given how difficult it might be to predict a turnaround in the business, we may select RGR on share price weakness, or if the stock nears a new 52-week low ($6.41).” WL 2006
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* RGR shares reached a new 52-week and 13-year low of $5.76 last week. It remains to be seen if the dramatic increase in volume on Friday was the result of short covering or long-term buying interest.
On the positive side of things, RGR’s firearm sales continue to stabilize (unit shipments +1% in 1Q06), the casting side of the business could be running hot enough (despite losing money) to arouse suitor interest, and if the company efficiently uses capital in 2006 it is possible that RGR could produce free cash flow and/or keep shareholders’ equity above $110 million.
With a long and successful operating history, a stronger balance sheet than many of its smaller competitors, RGR remains on the Watch List with a reevaluation target of $5.00-$5.50. As of 1Q06, the company’s tangible book value is $4.19 a share.
Download: RGR Financial Highlights (Excel)
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