Cyclical stocks like Ruger are hard to value. Nevertheless, I did my best with a two-stage discounted cash flow valuation model. I used Year 0 cash flow of $15 (the average over the last five years), a discount rate of 11%, a growth rate of 10%, going down incrementally to 6% at Year 10 and to 4% after that. That gives a per-share valuation of $15.98. Being a little more generous in these assumptions led me to a value of around $20 per share. At $27 per share, Ruger is overvalued by 35% to 69%. I like Ruger as a company (I wouldn't have bought its stock otherwise), but it's now an overvalued, cyclical stock. To my way of thinking, it's time to sell, not to hang on hoping for more earnings that blow away analyst predictions.
How did they beat expectations? According to today's conference call, Ruger recently introduced the 1911 handgun, which has been flying off the shelves. Some of their other new products have sold well and had better returns. Much of it has had to do with improved efficiency in their operations--and there's only so much efficiency a company can gain. On the down side, they've been able to raise their prices about 1%; a competitor seems to have started a price war. (As an aside, my favorite quote from the conference call: "About half the people who say they don't like Obama will go out and secretly vote for him." Gun enthusiasts are notoriously non-Democrat.)
A hat tip to my father for telling me what he knew about Ruger last year when it showed up on the Magic Formula stock screener--even though my phone call woke him up.
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