Taking Stock: Aim for Ruger When Considering American Gun Stocks

Dear Mr. Berko: What do you think of gun company Smith & Wesson? I'd like to invest about $8,000 in a gun manufacturer, and this seems like the best candidate. In fact, it seems that the only other candidate is Ruger.

I own a Smith & Wesson pistol that belonged to my great-grandfather, and it still looks brand new. I've also got a shiny Ruger. Both shoot the same bullet, but the Smith gun is always worth much more than a Ruger.

Do you approve of the Smith & Wesson stock?

--M, Oklahoma City

Dear OM: Smith & Wesson (SWHC-$2.95) makes what is considered to be one of the finest factory-production revolvers in the universe, and some of the company's semi-automatics (especially its Model 52) are elegant masterpieces.

Smith & Wesson has been making firearms since Franklin Pierce was elected president in 1852. As a gun enthusiast, I bought 10,000 shares of SWHC in Dec. 2000 at 16 cents a share, intending to give 100 share certificates as birthday presents to members of the gun club where I shoot and as unusual gifts to others who appreciate the Smith name. But the cost to register and ship a 100-share certificate was $87, which was $86.84 more than the price of the stock. I sold 9,000 shares of SWHC, kept 1,000 shares and barely broke even.

Smith makes an undeniably fine handgun and has undeniably lousy management; unfortunately, Messrs. Debney, Buchanan, Willingham and McPherson would be unable to sell an American dollar for 75 cents. Smith's 1,600 employees produced $400 million in revenues last year and in the process lost $89 million. SWHC's earnings for 2012 are expected to fall to 8 cents a share from last year's 30 cents on a 12 percent increase in revenues. How sad!

This doesn't look good for SWHC, and its past record of poor earnings is an affront to every gun enthusiast who respects quality. And though I admire the SWHC firearm, I'm not enthusiastic about its other products, such as guard booths; tire drops; canopies; security and detection systems; fencing; gates; mobile barriers; facility analysis; design; and engineering. As my Dad used to say, ''If you've been planting the best cotton crop in the country for 150 years, it ain't smart to start growing watermelons in the same garden.''

However, you should take a peek at Sturm, Ruger & Company (RGR-$26.10). RGR is SWHC's closest public competitor at $280 million in revenues, 1,000 employees and earnings of $31 million, or $1.60 a share, last year. Ruger is also a fine firearm, but it does lack the cache, history and balance of a Smith & Wesson. Ruger has been making guns in the U.S. since 1948, and while a Ruger firearm doesn't hold its value as well as a Smith, it's still considered a darn good piece.

So yes, RGR would be an overall better investment. RGR stock was trading at $10 a share when SWHC was trading at 20 cents, and it pays a 2 percent dividend. Earnings this year ($1.76 a share) are up from last year's $1.46, and in 2012, RGR believes it can earn $1.96 on a 15 percent increase in revenues.

RGR's income statement and balance sheet are textbook-clean, the company has zero debt, over $80 million in cash and net profit margins of 11 percent. RGR's management sticks to its knitting, and the company makes good, affordable pistols, shotguns, revolvers and rifles.

While it doesn't necessarily make a superior gun, RGR is certainly a superior company. So consider owning 300 shares and reinvest the dividend.

Please address your financial to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com. COPYRIGHT 2011 CREATORS.COM

Published: Mon, Dec 26, 2011