Breaking Views

America's gun spree could run out of ammo

Fears of limits from a liberal president are firing sales, but gun-makers only have so many weapons in their arsenals.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Robert Cyran, breakingviews.com

(breakingviews.com) -- Private equity shop Cerberus plans to float gun-maker Freedom Group soon. It had better hurry. President Barack Obama's victory sent weapon sales -- and the valuations of firearms producers -- shooting upward. Falling backlogs hint sales could plunge. The U.S. gun bubble may backfire.

Two sparks set off this speculative burst in the gun business. First, fears of economic calamity inspired sales of weapons -- Sturm, Ruger's 30 shot autoload SR-556 rifle is useful according to the company for shooting varmints and for "personal defense", presumably pesky biped varmints.

Second, gun collectors feared a Democratic president would restrict gun ownership. After all, you can't buy the SR-556 in blue-state strongholds California and Massachusetts.

There's plenty of anecdotal evidence of mania in the sector. Retailers reported ammunition shortages. Gun show attendance overflowed. Firearms factories are running flat out.

Meanwhile, insiders are preparing for a slowdown. Smith & Wesson diversified into security systems. Cerberus' decision to sell may be indicative of a top -- the durability of recent demand is indeed listed as a risk factor in Freedom Group's prospectus.

The figures are more damning. Total U.S. firearm sales should be around $3 billion this year. That's twice to three times as much as is typically spent according to estimates derived from Treasury excise taxes. Background checks over the past 12 months, which are a leading indicator of gun sales, were 50% higher than the levels reported during the middle years of the decade.

Naturally, rising sales lit a fire to stocks of gun makers and sellers. Armaments manufacturers Smith & Wesson (SWHC) and Sturm, Ruger (RGR) saw their stocks rise 115% and 85% respectively since the election last November. Hunting superstore Cabelas (CAB) has risen 70%.

This bubble may already be deflating. Smith & Wesson's backlog hit $268 million earlier this year and shrank to $177 million last quarter due to cancellations and fewer orders. Considering it only stood at $50 million in April 2008, the backlog could have much further to fall. Sturm, Ruger reported roughly similar figures.

This could prove painful for all involved. If sales fell to more typical levels of recent years, up to two-thirds of U.S. gun sales could disappear. And they could fall further. There are somewhere between 200 million and 300 million fireable guns (estimates vary widely) already in the U.S. Firearms have a very long lifespan if properly treated.

Gun buyers may well decide their now-stuffed racks don't need more company for a few years. To top of page

Company Price Change % Change
Bank of America Corp... 15.81 -0.23 -1.43%
Apple Inc 128.46 -1.96 -1.50%
General Electric Co 25.99 0.10 0.39%
Microsoft Corp 43.85 -0.20 -0.47%
Chesapeake Energy Co... 16.68 -0.52 -3.02%
Data as of Feb 27
Index Last Change % Change
Dow 18,132.70 -81.72 -0.45%
Nasdaq 4,963.53 -24.36 -0.49%
S&P 500 2,104.50 -6.24 -0.30%
Treasuries 2.00 -0.01 -0.69%
Data as of 2:02am ET
More Galleries
Star Trek technology that we use today With the death of Leonard Nimoy, the actor who played Star Trek's Spock, we remember his character's legacy: The technology we use every day. More
Zombie brands with a second life Where you can still get an Ionic Breeze air freshener. The Sharper Image and five other bankrupt brands still walk among the living, sort of. More
4 trends popping up in high-end kitchens Here's what luxury homeowners are adding to their kitchens. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play