Last updated: January 31, 2013 5:53 pm

Gun makers’ margins caught in crosshairs

Michael Kiefer, of DeFuniak Springs, Fla., checks out a display of rifles at the Rock River Arms booth©AP

Advocates of US gun control have set their sights on some of the firearms industry’s most profitable products, leaving gun makers and dealers facing a big drop in revenue if a federal ban on assault weapons goes into effect.

Sales and profits have been driven in recent years by the increasing popularity of tactical rifles and high-capacity ammunition magazines – the items targeted by a bill introduced in Congress last week.

Calls for restricting semi-automatic rifles and high-capacity magazines have grown louder since the weapons were used in mass shootings at Sandy Hook elementary school in December and a cinema in Aurora, Colorado, last summer.

New York state tightened its gun laws this month and President Barack Obama has endorsed a federal ban on certain semi-automatic rifles. But even the sponsor of the new legislation, Senator Dianne Feinstein of California, has acknowledged that it will be an “uphill fight” to prohibit sales of some of the most popular items on the market.

Since the 1994 federal assault weapons ban expired in 2004, “tactical rifles have been one of the fastest-growing sectors” in the firearms industry, says Rommel Dionisio, an analyst at Wedbush Securities. They are “a very significant source of revenue to manufacturers and retailers” that carry high margins, he says. “A top-line handgun may retail for $500 whereas a tactical rifle may retail for twice that.”

Manufacturer Smith & Wesson estimates the US consumer market for “modern sporting rifles”, the industry’s preferred term, to be $489m compared with $1.5bn for handguns and $632m for hunting firearms. But despite its smaller size, the category has proven highly popular among American gun enthusiasts.

Freedom Group, the largest US gun maker by sales, estimates the commercial market for tactical rifles grew at a compound annual growth rate of 27 per cent from 2007 to 2011.

A survey of retailers by the National Shooting Sports Foundation, an industry trade group, found modern sporting rifles accounted for about 19 per cent of total sales in 2011, second only to semi-automatic pistols.

“MSRs were among the hottest sellers during the firearms sales boom from late 2008 through early 2010,” the National Shooting Sports Foundation says on its website. A 2010 survey found 60 per cent of tactical rifle owners owned more than one.

Demand for all types of guns has risen steadily since the weapons ban lapsed in 2004, according to Federal Bureau of Investigation records of background checks for firearm purchases.

The FBI does not track gun sales and there is not a one-to-one correlation between background checks and purchases. Federal checks are not required for private sales, such as those at gun shows, and a customer is able buy more than one gun in any single transaction.

But the increase in checks suggests more guns have been sold in the years since the ban expired. Since 2006, the FBI recorded annual increases in checks of more than 10 per cent in all but one year.

Last year, checks jumped 19 per cent to 19.6m. The strongest surges came in November (31 per cent), the month of Mr Obama’s re-election, and December (49 per cent), the month of the Sandy Hook killings.

“Regulatory issues have been the biggest [factors] affecting gun sales,” Mr Dionisio says. While sales growth in the industry has historically ranged from 6 to 8 per cent annually, he says demand climbed in early 2012 “as consumers already began to fear or discount the possible re-election of President Obama and the possibility he might tighten gun control laws”. The renewal of the gun control debate after Sandy Hook added to momentum, he says.

That event [Sandy Hook] really was a watershed event that really pushed a lot American citizens over the edge [on gun control]

- Rommel Dionisio, analyst at Wedbush Securities

Privately owned Freedom Group, which makes the Bushmaster rifle used at Sandy Hook, reported net sales of $677.3m in the nine months through September 2012, up 20 per cent from the same period in 2011. The company said the increase was “primarily the result of strong market demand for modern sporting products”.

At Smith & Wesson, which says it holds 15 per cent of the tactical rifle market, net sales in the six months through October 31 were running 48 per cent ahead of the same period in 2011. In fiscal year 2012, the company booked $16.1m in net income on $412m in revenues.

The company’s modern sporting rifle category, which includes models retailing for up to $1,949, accounts for about 20 per cent of its sales, according to Mr Dionisio. Pistols that take high-capacity magazines contribute another 30 to 40 per cent.

“Such a ban could likely entice consumers to trade down to lower-priced handguns that are lighter, smaller (thus more concealable) and, most importantly, cheaper,” Mr Dionisio wrote in a recent note to clients. That, he warned, could shave 40 cents from the company’s earnings per share this year. Wall Street expects EPS of $1.04 for fiscal year 2013, according to Bloomberg data.

Ultimately, the strong sales the industry has seen in recent years, which has helped Smith & Wesson’s shares nearly double in the last year, are “likely unsustainable” as a ban gains public support, Mr Dionisio said.

Freedom Group’s private equity owner, Cerberus, has already bowed to pressure after the Sandy Hook massacre, announcing in December it would sell its stake in the gun maker.

Sandy Hook “captured the American consciousness”, Mr Dionisio says. “That event really was a watershed event that really pushed a lot American citizens over the edge [on gun control].”

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