The U'S' Firearms Industry

1
The U.S. Firearms Industry

• Small Arms Research Group (SARG)
• J. Brauer, P. Hall, S. Markowski, M. Jonas, S.
  Koorey, D. Kahraman, P. Basciano, M. Howard
• COST meeting, Brussels, 17-19 March 2008

2
The U.S. Firearms Industry

• In the few minutes I have, I want to leave you
  with four impressions regarding our ongoing
  research on the U.S. firearms industry
• Preliminary research meant to show what sorts
  of research may be possible
• Research company and industry research
• Econ impact (supply-side) demand-side
• Back to supply-side profits, performance,
  proliferation paper 2 supply-chain papers
• Now originators of firearms (picking up on
  Gabelnick, Haug, Lumpe, Sept. 2006, SAS paper)

3
The U.S. Firearms Industry

• 1. Location analysis industry entry/exit
  analysis production clusters (GIS)
• 2. Market concentration measures (BATF)
• 3. Recent merger acquisition activity (e.g.,
  Cerberus Capital Management LP)
• 4. Accounting/financial analysis (Ruger)

4
1. Location analysis (GIS)

• Discovery of clusters
• U.K., Spain, Italy, France, Germany
• Economies of agglomeration
• LDCs Pakistan? South Africa?
• Determinants of location
• Water-power electrification
• Transport canals, railroads, major highways
• Determinants of industry entry/exit
• Labor costs/OSHA regulatory costs
• Federal, state, local gun laws

5
2. Market concentration (BATF)

• BATF data (1980-2005/1998-2005)
• By pistols, revolvers, rifles, shotguns, other
• By manufacturer (FFL license holder and
  establishment)
• For commercial and law enforcement sales (not
  military sales)
• Rank order analysis (1998-2005)
• Concentration data (1998-2005)

6
Market concentration/ranks
7
Market concentration/ranks
8
Market concentration

• 4-firm/8-firm out of all firms in the market
• HHI Sum of squared market shares (Ssi2)
• For example,
• 5 firms 50 30 10 5 5 100
• Top 4-firms 95
• HHI 502 302 102 52 52 3,550
• (HHI min gt 0 HHI max 10,000)
• HHI 1,000 gt competitive
• HHI 1,800 non-competitive

9
Market concentration
10
Market concentration
11
3. Recent MA activity (2007)

• Ceberus Capital Management LP
• CCM division (Heritage Arms LLC) bought
  Remington Bushmaster Firearms DPMS
• Bushmaster bought Cobb Mfg and formed the
• Bushmaster Custom Shop by Iron Brigade
• Remington bought Marlin Firearms
• Remington already had the Parker trademark
• Marlin already had the HR 1871 New England
  Firearms and L.C. Smith trademarks

12
3. Recent MA activity (2007)

• Cerberus Capital Management LP
• Based on 2004 BATF data, CCM would now hold about
  48 of the commercial and law enforcement U.S.
  rifle market, 2.5 times that of the next
  competitor (Ruger)
• In the military market, CCM appears set to
  compete with Colts Defense and FN Herstal, FN
  USA, FN Mfg. for M16/AR15-style rifles

13
3. Recent MA activity (2007)

• Smith Wesson Holding Corp. (handguns)
• Bought Thompson/Center Arms (longguns)
• Browning
• U.S. Repeating Arms gt Winchester Repeating Arms
  gt part of FN Herstal (under Olin Corp license)
• Keystone Sporting Arms Inc
• Bought Rogue Rifle Co.
• O.F. Mossberg
• Already owned Maverick Arms
• Concluded co-production agreement with TASER

14
4. Accounting/financial analysis

• Sturm, Ruger, and Co., Inc. (Ruger)
• Established 1949 on NYSE since 1990
• Electronic SEC filings back to 1995 with some
  data going back to 1991 (quarterly data!)
• Earlier records should be available in paper form
• Others
• Smith Wesson Holding Corp.
• Remington Arms
• Others? e.g., Taser, ATK, Olin

15
4. Accounting/financial analysis

• What can be calculated?
• ?EPS vs ?GDP business cycle analysis
• Aggregate sales/submarket sales (pistols,
  revolvers, rifles, shotguns)
• Profitability analysis gross profit, EBIT,
  EBITDA, net profit margins, return on assets,
  return on equity benchmarks
• Share analysis P/E P/BV benchmarks
• Earnings management analysis
• Pricing analysis inputs, labor, legal costs,
  etc. inventory costs costs of goods sold (COGS)
• Etc.

16
The U.S. Firearms Industry
Thank you.Contact jbrauer_at_aug.eduQuestions?

• Small Arms Research Group (SARG)
• J. Brauer, P. Hall, S. Markowski, M. Jonas, S.
  Koorey, D. Kahraman, P. Basciano, M. Howard
• COST meeting, Brussels, 17-19 March 2008