Shares of gun-related companies soared Wednesday as President Obama revealed his plans for the most comprehensive set of gun-control proposals in 20 years.
The proposals triggered a rally in shares of gunmakers Smith & Wesson and Sturm Ruger, which both jumped amid the president's remarks. Smith & Wesson gained 48 cents, or 5.7%, to $8.91, and Sturm Ruger rose $2.39, or 5.0%, to $50.38. Shares of gun retailer Cabela's rose $2.87, or 6.1%, to $49.75.
Sales have been strong for months, and ammunition has been in short supply, as buyers stock up on fears weaponry will be hard to get if Obama successfully champions stronger sale and possession controls. Shares of Smith & Wesson and Sturm Ruger have risen more than 100% and 50%, respectively, since the beginning of 2012 as gun sales have taken off.
"Consumers are rushing to stores to purchase (firearms) as quickly as they can," says Rommel Dionisio of Wedbush Securities. "They have been doing that, but (Obama's announcement) is likely to push the surge to be even more heightened than before."
Obama's plan calls for more comprehensive background checks on gun purchasers, as well as a prohibition on assault weapon sales. The proposals also call for limiting a weapon's ammo magazine capacity to 10 rounds or less.
Bans on these types of weapons could hurt gunmakers, since those have been areas of profitablity and growth, Dionisio says. Revenue at Smith & Wesson and Sturm Ruger is up more than 50% in the companies' most recently reported quarters.
Analysts, meanwhile, are calling for gunmakers to put up strong earnings growth. Earnings are expected to grow by 163% at Smith & Wesson in the quarter ended in January, says S&P Capital IQ. Sturm Ruger is expected to report 30% higher growth in the quarter ended in December.
The White House is reacting to recent mass shootings, such as the one last month at a Connecticut school, and wants to work on prevention of future tragedies. Public opinion is behind gun-control measures, Dionisio says, adding that putting gun control in place is a legacy Obama may want to leave in his second term.
But it won't be easy. Many federal and state lawmakers have said they'd vote against stricter controls. "It's going to be a tough fight," Dionisio says.
Given that the gunmakers' shares have run up so much already, and the companies might hit weaker sales in the future, it might be too late for investors to jump in, says Dionisio, who rates Smith & Wesson a "neutral." "This is an unsustainable level of demand in the long run," he says.
