Ruger currently trades at $42.80 per share and has shown little upside over the past six months, posting a middling return of 4.7%. The stock also fell short of the S&P 500’s 16.6% gain during that period.
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Why Do We Think Ruger Will Underperform?
We’re passing on Ruger for now. Here are three reasons we avoid RGR, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Ruger’s demand was weak and its revenue declined by 3.8% per year. This was below our standards and is a sign of poor business quality.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Ruger has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 7.7%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, Ruger’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Ruger falls short of our quality standards. With its shares lagging the market recently, the stock trades at 22.2× forward P/E (or $42.80 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Ruger
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