EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It’s often confused with cash flow, and it’s pretty easy to, uh, massage. So, when the good folks at mysmartrend.com report that Sturm, Ruger & Co. -12.1 percent EBITDA growth is worse than Mattel’s and Hasbro’s, don’t pay it much nevermind. First, leisure industry? Second, cash on hand is a better measure of a company’s overall health. And Sturm, Ruger & Co. have plenty. Enough so that they decided to invest it . . . in themselves. In fact, if mysmarttrend.com is trying to put buyers off Ruger’s stock, they ought to talk to the company . . .

Last week, Sturm, Ruger & Co. repurchased 412,000 shares of its common stock for $5.7 million, shelling out $13.83 per share. The shares account for 2.1 percent of the outstanding shares as of Q3 2010. Sturm funded the buy-back with cash on hand.

The company’s product portfolio is in excellent shape. The LCP is still a strong seller, and concealed carry permits are a growth area. The stock price peaked back in May, leveling out at around $15 for the last six months. Going back three years, it’s tripled. The cash flow’s looking good.

I reckon Ruger’s got it right. While it’s hard to see Ruger above $20 a pop in the short term, it’s a good time to buy back some shares for the execs, to reward them for pushing the gunmaker ahead of Smith & Wesson in terms of market share. If they can keep their branding strong and turn share into profits, the investment will pay off handsomely for all concerned. If not, not.

I’d consider taking a flyer on Ruger myself, only that would be a conflict of interest and I still haven’t forgiven the company for the Ruger letter. At least until they make something I really, really want.

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3 COMMENTS

  1. Actually, EBITDA is a non-GAAP metric which stands for "earnings BEFORE interest, taxation, depreciation, and amortization". Those metrics are purposely left out in order to measure cash earnings without accruals, tax benefits/implications and write-offs, and the effects of different capital structures. The major reason for showing EBITDA is to portray to share/stakeholders that the company is doing fine. A company can have a stellar EBITDA (hopefully showing increased sales, revenue, reduced spending, etc), but can still end up with zero net profit, or even “in the red” on the final P&L because of various reasons. This is almost always done to reduce tax liabilities for the current year (the less profit you show, the lower your taxes), but if sometimes done to reduce liabilities for upcoming years (years that the company forecasts as being extremely profitable).

  2. EBITDA is not easy to manipulate. Investors like it because it strips out all of the easily manipulatable variables (interest, depreciation, taxes, depreciation, and amortization) off the financial statement. As such, it is a better measure of how profitable are a company's operations — in the short term, better than cash flow (depending on what cash flow measurement model you are using).

    EBITDA of -12.1% would indicate that this is a company that IS in crisis. But that's not what mysmartrend.com is reporting. They are saying that RGR's project EBITDA is -12.1% vs. last year's. Well, last year (2009) RGR had an exceptional year with an EBITDA of $52.4MM on $271MM operating revenue (19.3% margin). Compare that to RGR's 2006 results: EBITDA of $4.1MM on $168MM operating revenue (2.4% margin).

    If projected EBITDA is down 12.1%, that means that RGR will still have an operating profit before depreciation of more than $46 million on the year. That ain't so bad in this economy.

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