First Cut Stock Study Report

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Jonas Douglas
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1 First Cut Stock Study Report Company Name: Strum Ruger & Company Ticker: RGR Date of Study: 6/11/2014 Price: $ Your Name: Rebecca Lohr City: Madison Heights State: MI Chapter Name (if applicable): BetterInvesting Staff Discuss why you consider this to be a high quality, growth company that should be investigated further. Please include comments on historical sales and EPS growth, pre-tax profit margin, return on equity, and debt. Strum Ruger & Company is a high quality company with predicitble sales and EPS. They are first in the design, manufacture, and sale of pistols, revolvers and total firearms produced overall. Pre tax profit and ROE are good and trending positively. They have also had zero debit since they opened their doors in Briefly describe how the company makes money: Sturm, Ruger & Company, Inc is principally engaged in the design, manufacture, and sale of firearms to domestic customers. The Company produces rifles, shotguns, pistols, and revolvers. Approximately 99% of the Company s total sales for the year ended December 31, 2013 were from the firearms segment, and approximately 1% was from investment castings. Export sales represent approximately 3% of firearms sales. The Company s design and manufacturing operations are located in the United States and almost all product content is domestic. For the years ended December 31, 2013, 2012, and 2011, net sales attributable to the Company s firearms operations were approximately $678.6 million, $484.9 million and $324.2 million or approximately 99% of total net sales in each year. The balance of the Company s net sales for the aforementioned periods was attributable to its investment castings operations. Projected growth rate for sales: 10% Why did you select this rate? Discuss from where future growth will come. RGR is a medium sized company which has a good historical 10 year revenue growth of 18.0%, 5 year growth of 28.7% and quarter over quarter sales growth of 8.9%. This company compares favorably with my chosen peers (SWHC, BEAV and GY). My projected growth rate of 10% is primarily based on the expectation of sales to go down from previous years but turn around and begin to rise again when hunting season starts. Analysts suggest that the growth rate for sales will be down. However, RGR has grown almost This stock study reflects the judgment of the contributor(s) only and no investment recommendation is intended. Investors should always conduct their own analysis before making an investment decision. This report may reference websites, products or services not endorsed by BetterInvesting and that may require usage fees. The preparer(s) of this report is not endorsing or promoting the use of these websites, products or services.

2 every year and even when Sales Growth is down, several other financial indicators continue to be positive. Since RGR is a true 2-step distribution company, selling to only 15 wholesale distributors, sales growth decreases are usually attributed to over stock piling by these distributors. Also, fears that government regulations might be imposed on purchases by consumers may cause sales to jump rapidly and slowly decrease as the fear dissipates. Having no true indicator of future sales other than those listed and considering applications for criminal background checks as reported by the National Instant Criminal Background Check System which shows numbers slowly increasing after a slight decline, sales growth is difficult to predict. Lastly, in recent years RGR has opened a new factory and invested in Kodabow, Inc. Crossbow Manufacturers which will help to expand its infrastructure and reach a new growing community of crossbow users. For these reasons I decided to give them more growth than analyst and expect for Sales Growth to continue to rise over the next few years. Projected growth rate for earnings per share: 9.0% Why did you select this rate? These earnings per share growth rate are based primarily on the Preferred Procedure Calculation. I adjusted the Pre-tax Profit Margin to 23% to better reflect their more recent margins rather than the 5 year average of 20.3%. This results in an 8.7% projected growth rate for EPS. I rounded up for a solid 9.0%. RGR has continued to show profit over the years. Trends show that in the next few years earnings will increase. RGR earnings have grown 72.5% on an annualized basis over the last 10 years, 43.8% for the last 5 years and quarter over quarter earnings growth of 2.0%. RGR appears to compare favorably with peers. Projected High P/E: 14.0 Why did you select this value? The 5 year average was 14.34%. I rounded down to 14 because I noticed that the high PE s have been slightly fluctuating up and down in recent years and the current P/E is Projected Low P/E: 7.00 Why did you select this value? I've selected the default low P/E based on historical averages. The 5 Year average is I rounded down to 7.0 because the Low PE's have been slightly declining in recent years. Projected Low Price: $39.3 Why did you select this value? The low PE value of 7 multiplied by the last 4 quarter EPS of 5.61 provides a low stock price potential of I compared this to the last 52 weeks and the last year and this seems reasonable. The current prices is This stock study reflects the judgment of the contributor(s) only and no investment recommendation is intended. Investors should always conduct their own analysis before making an investment decision. This report may reference websites, products or services not endorsed by BetterInvesting and that may require usage fees. The preparer(s) of this report is not endorsing or promoting the use of these websites, products or services.

3 At the current price, the stock is a (check one): Buy or Hold or Sell At the current price, the upside-downside ratio is: 2.6 to 1 Compound Annual Return Using Forecast High P/E: 16.4% Your final recommendation (check one): Explain: Buy or Hold or Sell With the exception of the years 2004 and 2005 when earnings fell due to a decline in the overall firearms market and several costly municipal lawsuits that were dismessed, sales and earnings are generally up straight and parallel. In addition, RGR began upgrading equipment to improve the production process and keep up with demand. RGR has done better than the chosen peer group with numbers increasing for the last 5 years from over 16% to over 25% with the last two years being above the average. RGR ranks above its peer group on return on equity. The 5 year average is 43%. RGR has NO DEBT and has never had debt since the day it opened its doors in Each of it's peers carries some debt. RGR has shown a trend over the years that seems to be continuing. Currently that trend is to have sales slightly declining with the expectation of them to rise again soon. For these reasons I have recommended a HOLD. This stock study reflects the judgment of the contributor(s) only and no investment recommendation is intended. Investors should always conduct their own analysis before making an investment decision. This report may reference websites, products or services not endorsed by BetterInvesting and that may require usage fees. The preparer(s) of this report is not endorsing or promoting the use of these websites, products or services.

Stock Selection Guide Company Sturm Ruger & Compan Date 6/10/2014 Prepared by Lohr Data taken from BI Stock Data Where traded NYSE Industry Aerospace & Defense Capitalization --- Outstanding Amounts

4 Stock Selection Guide Company Sturm Ruger & Compan Date 6/10/2014 Prepared by Lohr Data taken from BI Stock Data Where traded NYSE Industry Aerospace & Defense Capitalization --- Outstanding Amounts Reference Preferred ($M) 0.0 % Insiders % Institution Common (M Shares) Debt ($M) 0.0 % to Tot Cap 0.0 % Pot Dil VISUAL ANALYSIS of Sales, Earnings, and Price Symbol: RGR FY2013 QuarterEnding (03/14) Sales ($M) Earnings Per Share Latest Quarter Year Ago Quarter Percentage Change % % (1) Historical Sales Growth 28.7% (3) Historical Earnings Per Share Growth 43.8% (2) Estimated Future Sales Growth 10.0% (4) Estimated Future Earnings Per Share Growth 9.0%

5 2 EVALUATING Management 5 5-YEAR POTENTIAL This combines price appreciation with dividend yield to get an estimate of total return. It provides a standard for comparing income and growth stocks. A Present Full Year's Dividend $ Present Price of Stock B AVERAGE YIELD - USING FORECAST HIGH P/E Avg. % Payout 27.7 % 2.0 % Forecast High PE C COMPOUND ANNUAL RETURN - USING FORECAST HIGH P/E Annualized Appreciation Average Yield Annualized Rate of Return 14.4 % 2.0 % 16.4 % % Present Yield AVERAGE YIELD - USING FORECAST AVERAGE P/E Avg. % Payout 27.7 % 2.6 % Forecast Average PE COMPOUND ANNUAL RETURN - USING FORECAST AVG P/E Annualized Appreciation Average Yield Annualized Rate of Return Sturm Ruger & Compan Last 5 Year Avg. Pre-tax Profit on Sales 4.9% 0.9% 1.1% 11.4% 7.7% 16.4% 17.5% 19.2% 22.9% 25.4% 20.3% % Earned on Equity 3.6% 0.7% 1.0% 12.6% 12.5% 28.4% 24.1% 29.0% 72.9% 60.3% 43.0% % Debt To Capital 0.0% 0.0% 0.0% 0.0% 1.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3 PRICE-EARNINGS HISTORY as an indicator of the future This shows how stock prices have fluctuated with earnings and dividends. It is building block for translating earnings into future stock prices. PRESENT PRICE 61.7 HIGH THIS YEAR LOW THIS YEAR A B C D E F G H Year Price Earnings Price Earnings Ratio Dividend % Payout % High Yield High Low Per Share High A / C Low B / C Per Share F / C * 100 F / B * AVERAGE CURRENT/TTM AVERAGE PRICE EARNINGS RATIO 10.7 CURRENT PRICE EARNINGS RATIO 11.0 EVALUATING RISK and REWARD over the next 5 years Assuming one recession and one business boom every 5 years, calculations are made of how high and how low the stock might sell. The upside-downside ratio is the key to evaluating risk and reward. A HIGH PRICE - NEXT 5 YEARS Avg. High P/E X Estimate High Earnings/Share 8.64 Forecasted High Price $ B LOW PRICE - NEXT 5 YEARS (a) Avg. Low P/E (b) Avg. Low Price of Last 5 Years (c) Recent Market Low Price (d) Price Dividend Will Support 7.00 X Estimate Low Earnings/Share 5.61 Forecasted Low Price $ Present Dividend High Yield Selected Forecasted Low Price $ 39.3 C ZONING using 25%-50%-25% Forecasted High Price Minus Forecasted Low Price Range. 25% of Range 20.4 Buy Zone Hold Zone Sell Zone % 39.3 to to to Present Market Price of is in the Hold Zone D UPSIDE DOWNSIDE RATIO (POTENTIAL GAIN VS. RISK OR LOSS) High Price Minus Present Price Present Price Minus Low Price To 1 E PRICE TARGET (Note: This shows the potential market price appreciation over the next five years in simple interest terms.) High Price Present Market Price X % Appreciation % 2.6 % 10.7 %

6 Study Notes Subject Description Sales Growth-RGR Earnings Note-RGR Sales, Earning, Price Comparison Note RGR is a Small sized company and has a good historical 10 year revenue growth of 18.0%, 5 year growth of 28.7% and quarter over quarter sales growth of 8.9%. This company compares favorably with my chosen peers (SWHC, BEAV, GY). RGR earnings have grown 72.5% on an annualized basis over the last 10 years, 43.8% for the last 5 years and quarter over quarter earnings growth of 2.0%. RGR appears to compare favorably with peers. With the exception of the years 2004 and 2005, sales and earnings are generally up straight and parallel. RGR's earnings fell during 2004 and 2005 due to a decline in the overall firearms market and several costly municipal lawsuits that were dismissed. In addition, RGR began upgrading equipment to improve the production process and keep up with demand. % pre tax profit note-rgr RGR has done better than the chosen peer group with numbers increasing for the last 5 years from over 16% to over 25% with the last two years being above the average. % Earned on Equity-RGR RGR ranks above its peer group on return on equity. The 5 year average is 43%. Debt note-rgr Company Infor 1-RGR Company Info 2-RGR Company Info 3-RGR Company Info 4-RGR Forecast Sales Growth Rates Earning Growth Rate Forecast High P/E Note Low P/E Note Low Price Note RGR has NO DEBT and has never had debt since the day it opened its doors in Each of it's peers carries some debt. Sturm, Ruger & Company, Inc is principally engaged in the design, manufacture, and sale of firearms to domestic customers. The Company produces rifles, shotguns, pistols, and revolvers Approximately 99% of the Company s total sales for the year ended December 31, 2013 were from the firearms segment, and approximately 1% was from investment castings. Export sales represent approximately 3% of firearms sales. The Company s design and manufacturing operations are located in the United States and almost all product content is domestic. The Company s firearms are sold through independent wholesale distributors, principally to the commercial sporting market. The Company manufactures and sells investment castings made from steel alloys for both outside customers and internal use in the firearms segment. Investment castings sold to outside customers, either directly to or through manufacturers representatives, represented approximately 1% of the Company s total sales for the year ended December 31, For the years ended December 31, 2013, 2012, and 2011, net sales attributable to the Company s firearms operations were approximately $678.6 million, $484.9 million and $324.2 million or approximately 99% of total net sales in each year. The balance of the Company s net sales for the aforementioned periods was attributable to its investment castings operations. My projected growth rate of 10% is primarily based on the expectation of sales to go down from previous years but turn around and begin to rise again when hunting season starts. Analysts suggest this is a HOLD. I agree but also think you shouldn t hold off too long. While hunters are enjoying their summer and not purchasing firearms, they will start again soon in preparation for that time of the year. My earnings per share growth rate is based primarily on the Preferred Procedure Calculation. I adjusted the Pre-tax Profit Margin to 23% to better reflect their more recent margins rather than the 5 year average of 20.3%. This results in a 8.7% projected growth rate for EPS. I rounded up for a solid 9.0%. The 5 year average was 13.34%. I rounded down to 14 because I noticed that the high PE s have been fluctuating up and down in recent years and the current P/E is The 5 Year average is I rounded down to 7.0 because the Low PE's have been slightly declining in recent years. The low PE value of 7 multiplied by the last 4 quarter EPS of 5.61 provides a low stock price potential of I compared this to the last 52 weeks and the last year and this seems reasonable. The current prices is

Stock Selection Guide

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