Over the past six months, Ruger’s shares (currently trading at $32.95) have posted a disappointing 12.6% loss, well below the S&P 500’s 14.4% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Ruger, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.
Why Do We Think Ruger Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid RGR and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Ruger’s 1.4% annualized revenue growth over the last five years was weak. This was below our standards.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Ruger has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 6.9%, lousy for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. 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. After the recent drawdown, the stock trades at 21.7× forward P/E (or $32.95 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. Let us point you toward the most dominant software business in the world.
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