The Reason Colt Is Suspending AR-15 Production Is Not What You Think

Colt Manufacturing has announced it will cease production of modern sporting rifles like the AR-15, and although prominent news outlets mistakenly attribute this to the recent spate of mass shootings, it is still a significant development – one that could weigh on Sturm, Rüger (NYSE: RGR) and American outdoor brands (NASDAQ: SWBI).

Although the arms market has apparently started to recover and the FBI has been conducting more criminal background checks lately than it did a year ago, Colt’s decision to temporarily exit the consumer arms market suggests that there is still a significant overhang for other arms manufacturers.

The AR platform is the most popular firearm in the US Image source: Getty Images.

America’s rifle

The AR-style rifle is the most popular firearm in the country, owned by around 16 million Americans. The name AR stands for the original manufacturer of the rifle, ArmaLite, who eventually sold the rights to the AR-15 to Colt, who modified it and sold it to the US military as an M16 automatic rifle. Colt then made a civilian version, which is why the AR-15 is often mistaken for a military weapon, but it’s just a cosmetic veneer.

By law, the modern sporting rifle – the industry terms used to distinguish it from other, more traditional types of rifles – has internal properties that do not distinguish it from other semi-automatic rifles on the market. It fires one bullet after the other with every trigger and has the firepower like any other hunting rifle with a similar chamber.

It is not a “weapon of war” or even an “assault rifle”, which are actually machine guns and have been heavily regulated since 1934. Civil possessions were banned in 1986.

Other gun manufacturers also make AR-style rifles, such as Ruger’s AR-556, American Outdoors Smith & Wesson’s M & P15, and Remington’s R-15 VTR.

Change from civil to military markets

Colt’s decision to cease production of consumer rifles is significant, but not for the reasons stated. Colt said the market is saturated with ARs and there is ample capacity right now.

With dealerships having ample inventory of Colt AR-15s, the company switched its production from rifles to military and law enforcement contracts instead. The weapons manufacturer just received a $ 42 million order from the US Army to manufacture M4 and M4A1 carbines for about 14 foreign governments, including Afghanistan, Hungary, Jordan, Kuwait and Lebanon. The contract runs until 2024.

It makes more economic sense for Colt to focus on this market than one that is inundated with competing products that are driving prices down. Because of this, Ruger and Smith & Wesson should find no consolation in Colt leaving the consumer gun market.

The price is the greatest pressure

Speaking to analysts during Ruger’s conference call last month, CEO Chris Killoy said, “We’re seeing some great pricing right now on very well-performing M4 platforms like our AR-556. We’re seeing a lot of pressure there.”

James Debny, President and CEO of American Outdoor, said this, saying the company can’t really raise prices or needs to be very selective because “if we’re not careful we just won’t be competitive.”

The risk of a weak rifle market falls slightly more with Ruger than with Smith & Wesson, as the former produces far more rifles than its rival. Ruger is the largest arms manufacturer in the US precisely because it is also the largest arms manufacturer in the country, making almost 50% more than No. 2 Remington, which filed for bankruptcy last year.

Colt says it will consider re-entering the consumer rifle market if conditions improve, but given the weak price environment, Ruger, American Outdoor Brands, and other rifle makers may have a bigger target on their back.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all reflect critically about investing and make decisions that will help us get smarter, happier, and richer.

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