NICS - June 2019: The Bottom May Be In? Maybe

A deep dive into the most recently released NICS data by the FBI for the month of June 2019.

The adjusted NICS data showed a meaningful increase in the year-over-year background checks, driven by new gun control laws in California and Washington state.

Discussion of latest events and promotional activities and how they may impact investors of Ruger, American Outdoor Brands and Vista Outdoor.

Is the bottom in?

Over the last few years, I have been both loved and hated by firearms owners and investors.

Despite being a strong supporter of the 2nd Amendment, I warned firearms investors over the previous few years that President Trump would mean bad news for the firearms industry while at the same time, it would be a good time for gun rights.

As it turned out, it was a relatively bad time on both fronts. While President Trump's election eradicated the fear of imminent gun control, President Trump also used his executive powers to undermine gun rights through his support of banning accessories such as "bump-stocks" and his failure to support "common-sense gun laws" such as the Hearing Protection Act, which would align the United States with other countries such as New Zealand and numerous European nations where gun owners would be able to purchase firearms suppressors to protect hearing and reduce noise pollution without costly barriers to entry, such as the $200 tax stamp.

As a result, gun owners have largely stayed home and the industry, including our followed publicly traded companies suffered.

For first time readers, the purpose of this monthly series is to look at the latest publicly available background checks data to get a sense of the health of the firearms industry which you can then use as part of your overall due diligence efforts, whether it applies to your publicly traded firearms stocks or even your firearms business, be it your gun store, distributor or even manufacturing business.

As we noted in our last article, 2019 has continued to be a mediocre year, largely continuing the double-digit year-over-year declines in background checks. Those results have subsequently played out in the earnings results as reported by companies such as Ruger (RGR), American Outdoor Brands (AOBC), Vista Outdoors (VSTO), Sportsman's Warehouse (SPWH) and Olin (OLN).

We did however see some bright spots as both the January and May 2019 had given us a flat to slightly higher year-over-year number of background checks. The May data however was not exactly "clean" as the year-over-year increase was achieved on gains in two states, rather than broader, national trends.

So did June 2019 give us some better data? Or do we have more of the same?

For June 2019, the FBI reported a total of 2,312,309 background checks. The headline number is up 376,618 checks, or 19.45% from 1,935,691 reported for June 2018.

Generally, the June data is lower than the prior months, consistent with the overall seasonality of the firearms business. Vacations and the hot weather typically discourage people from visiting the range and hunting season did not yet start.

Of course, as regular readers now know, the headline numbers are heavily skewed as the bulk of these checks are related to concealed carry and ongoing background checks.

The year-over-year increase for June was caused by two states running significantly more permit rechecks, Illinois and Indiana.

Even though astute firearms investors know that the headline data can be largely ignored, I cover this because as misleading as it is, it is what most people look at first.

This is why we look at the adjusted background checks, as they are the more widely accepted data serving as a proxy for realized gun sales.

Looking at the adjusted background checks data initially had me excited and had me thinking that the title of this article would be "June NICS: The Bottom Is Likely In."

For June 2019, the FBI reported 492,915 handgun checks. This is up from 474,159 handgun checks in 2018, an increase of 18,756 checks or 3.95%.

What is more impressive is that this also shows a month-over-month increase from May 2019, versus the expected seasonal decline.

Just as we saw with May 2019 data, while the data is slightly higher, both 2018 and 2019 are below the 2016 and 2017 data, INCLUDING the fact that there was a full month of exposure to any fear-based buying caused by the Virginia shooting.

I feel like a broken record however long gun checks were once again the weakest data point this month.

For June 2019, long gun checks decreased to 291,049 from 291,522 a year earlier, a decrease of 473 or .16%. Just as we saw with May, this is the lowest June in nearly a decade! June 2019 was the lowest since June 2010.

Combined, June 2019 saw 856,794 background checks as adjusted by my methodology. This is up 32,176 checks, or 3.9% from 824,618 a year ago.

June also bucked the trend and actually showed a month-over-month increase from May, versus the expected seasonal decrease.

So is the bottom in?

As I wrote in the May article:

Unfortunately, June ended up being anything but clean.

As we discussed and expected, we were going to have an impact from the Virginia Beach shooting and we did, particularly in Virginia background checks.

Unfortunately, beyond the Virginia Beach shooting, 5 states, including Virginia, accounted for the 4% year-over-year increase. Those states are California, Minnesota, Washington and Wisconsin.

Excluding those 5 states, we would have another year-over-year decline for June.

So what happened in those states?

California - Starting July 1st, the state became the first in the nation to require background checks for ammunition purchases. As a result, we have continued to see massive increases heading up to the deadline, not just for ammunition, but firearms as well. California gun buyers purchased handguns, long guns, and other firearms, such as lower receivers. Handgun, long gun and other checks increased to 38,712, 27,050 and 4,856 for June 2019 versus 32,684, 23,612, and 3,921 for June 2018. This is an increase of 10,401 checks, or 17.27%!

Washington State - Not to be outdone, Washington state implemented new draconian legislations that went into effect on July 1st. These included raising the minimum age to purchase semi-automatic rifles to 21 along with requiring firearms training, a 10-day cooling off period, additional fees and registration. Furthermore, the state limited sales to out of state residents, passed "red flag" laws and safe-keeping requirements. Finally, the state is now requiring background checks on transfers between concealed carry license holders. Just as we saw in May, June sales picked up meaningfully. For June 2019, Washington State reported 28,670, 18,920, 12,059 and 3,101 handgun, long gun, other and multiple sales. This is an increase from 15,069, 9,423, 1,865, and 574 a year earlier. This is an increase of 35,819 checks or 133% from last year's 26,931 total combined checks!

Virginia - Seemingly, the Virginia Beach shooting had an effect on new gun owners. While long gun checks actually declined, Virginia did see an increase in the number of handgun checks. For June 2019, there was a reported 20,006 checks versus 17,812 handgun related checks for June 2018. This is an increase of 2,194 checks or 12.3%.

Minnesota & Wisconsin - These two states also showed some meaningful year-over-year increases. While neither state passed new legislation (that I could find), both of the states were discussing new proposals. In Minnesota in particular, legislators tried to attach various gun control bills to the spending bills. Ultimately, they failed.

In either case, Minnesota's checks increased to 14,735 for June 2019 from 9,264 in June 2018. This is an increase of 5,471 checks or 59% year over year.

For Wisconsin, the background checks increased to 19,462 for June 2019 vs 18,375 for June 2018. This is an increase of 1,087 checks or 5.9%. The increase came from new handgun checks.

What Does The June Data Mean For Investors?

As we saw in the above data, June continued to be a strong month, much as we saw in May, defying seasonal trends.

Unfortunately, that trend was certainly not national and was driven by a handful of states that sent gun owners cleaning out the shelves of their local gun stores.

While the bulk of the growth came in handgun checks, Washington state did meaningfully support long gun numbers for the month of June.

So who is likely to beat expectations?

We have already seen American Outdoor Brands report earnings where they bundled their way to a revenue beat. If you have not done so already, please take a look at my article, "American Outdoor Brands: 'Bundling' Delivered A Meaningful Revenue Beat."

I suspect the company shipped as many firearms as they could to those states (through buying groups and distributors) and there will be plenty of Smith & Wesson M&P and Shield pistols sold.

Likewise, I suspect Ruger will do quite well as well with their Ruger Security 9 full size and compact pistols.

As we have seen in previous fear-based runups, gun owners will first buy up what they want. Then they will purchase what they can get, starting with the value-based products, particularly if they can get multiples of the same item. This should fare quite well for both Ruger and American Outdoor Brands as they have pistols that are in that $200 to $450 market, below the Glock, Sig and HK price points.

Both companies also offer modern sporting rifles and should have an increase as well. While I do not have specific data for this rush, the strongest sellers during the Sandy Hook-inspired wave were typical $600 Bushmaster type AR-15s that gun dealers were selling and could not keep in stock for $1,500.

What will be interesting to see however is just how much Vista Outdoor will benefit through the California ammunition "ban," requiring gun owners to pass a background check to purchase a box of ammo.

Nationally, the price of ammunition has remained flat throughout the summer and deals are starting to pick back up. Nevertheless, by all accounts, sales of ammunition to California were quite strong.

As we know, the company does not have exposure to handgun sales as Savage did not produce handguns. In either case, this is a moot point now as the company has just announced that they have sold off Savage Arms for $170 million.

There is however a company that I believe will meaningfully benefit in the short term due to the new bans in both California and Washington State. As it is shorter term in nature and not necessarily a long-term investment, I will be discussing it as an opportunistic trade with Income Idea subscribers. The NICS series is primarily to serve the due diligence process in regards to the intermediate to longer-term time horizon.

Bottom line, June was a good month, and it will have a positive impact on the manufacturers versus year-over-year comparables, but as a longer-term trend, I don't believe it matters.

Over the past few months, we have seen a relatively flat environment despite new gun control initiatives and another senseless shooting. Those drivers are most likely not going to show up for the remainder of the year and the new draconian gun laws in both California and Washington State have taken effect July 1st.

So where do we go from here?

I believe once we look past the 5 states accounting for the increases, we can focus on the rest of the country.

What we find is that in both, bastions of gun freedom such as Alaska, Pennsylvania, Texas, Louisiana and New Hampshire, AND examples of gun control New York, New Jersey, and Massachusetts, the numbers are continuing to trend lower.

If we look at that as our outlook for the remainder of the year, once we get past the upcoming quarter which included May and June, barring new developments, I continue to see softness in the commodity side of the business such as ammunition and continue to believe the relative outperformance for both Ruger and American Outdoor Brands will have to come from differentiation and stealing market share from their peers as the overall pie continues to shrink and "normalize."

On a time line, I believe this means a better than expected upcoming earnings release, and then a weaker than expected rest of the year and likely through to the upcoming elections. Until then, it is just a waiting game until the Democrats bail out the gun industry once again. (By bailout I am not referring to financial bailouts such as Wall St., airlines and the auto industry, but rather announcing new gun control proposals that will once again send gun owners buying new firearms.)

In my next article, we will take a look at the recently, and finally announced sale of Savage Arms by Vista Outdoor.

I hope this was helpful and look forward to your comments!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Seekingalpha.com

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