Takeaway: The firearms industry could benefit from political heat.

Editor's Note: Below is an excerpt from a recent institutional research note written by Neil Howe. If you're interested in learning more about his research and how you can subscribe email sales@hedgeye.com.

Is Renewed Interest In Gun Control Disastrous for the Firearms Industry? Maybe Not - z990

Conventional wisdom says that rising interest in gun control should be disastrous for the firearms industry. Nearly 150 professional investors are "strongly urging" companies in any way involved with the manufacture and retail of firearms to take a stand. Dozens of big-name businesses, including Walmart, United, Wyndham, and Dick’s Sporting Goods, have either eliminated NRA discounts or increased gun-related restrictions. BlackRock, the world’s largest asset manager, is exploring ways to exclude gun makers from client portfolios.

All that must be bad for business, right?

Maybe not. In fact, the industry was already facing challenges even before Parkland. Firearms giant Remington announced in mid-February it was filing for bankruptcy, and stock prices of the publicly traded gun companies are all down. The big turning point was Trump’s election. In the run-up to the election, fearful red-zoners rushed to buy guns before Hillary had the chance to push through new regulations. It’s the same phenomenon that fueled a boom in sales of emergency food packets, outdoor gear, and other “survivalism” staples. (See: “I Will Survive.”)

On the contrary, the specter of a draconian crackdown on gun ownerwhip could actually be great for gun sales, and therefore for gun stocks. According to researchers from Wellesley College, the Sandy Hook and San Bernardino shootings resulted in huge spikes in gun sales amid calls for gun control from President Obama. No such spikes occurred after Las Vegas or Sutherland Springs; indeed, with little fear of new restrictions under Republican leadership, gun sales have plummeted. 

The industry experienced growing sales and market cap throughout the first six years of the Obama presidency. The outlook was especially bullish in the year following Sandy Hook (roughly, calendar year 2013), when Obama leaned heavily on Congress to pass legislation. Next year, when it was clear this legislation was going nowhere—especially after the second "Tea Party" victory for the GOP in November—sales and prices dropped.

Is Renewed Interest In Gun Control Disastrous for the Firearms Industry? Maybe Not - zzp

The recent gun boom hasn't been caused solely by a surge in consumer demand. Another driver has been the dramatic post-9/11 militarization of U.S. federal agencies. According to nonprofit OpenTheBooks.com, roughly 120,000 federal agents were authorized to carry firearms in 2008, a 50% jump from 1998. Federal agencies spent a combined $1.5 billion on firearms from 2006 to 2014, with annual sales swelling to a high of $225 million by 2012.

These are not just your conventional FBI agents or corrections officers we're talking about: Agencies such as the Small Business Administration, the Department of Education, and the Environmental Protection Agency have each spent millions of dollars on firearms since 2006. These figures don't even count the outlays by state and local governments—which could soon get a boost from the Trump Administration's decision to reinstate the 1033 Program, which hands down surplus military hardware to police departments. And then there's President Trump's proposal to arm teachers and other school personnel. OK, this last idea is probably a nonstarter. Still, all these government dollars add up to plenty of arms purchases.  

The irony is that the faster Democrats storm into Congress with a conspicuous gun-control agenda, the better it will be in the near term for gun manufacturers. In the long term, if the government ever passes sweeping gun-control legislation that gains broad public backing, then yes at that point the firearms industry should worry. But even in that case, the continued militarization of government agencies could create an offsetting stream of demand for the industry.