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A Buyer's Guide to The Bushmaster Company

Looking for a last-minute Christmas present for that special person on your list? How about Freedom Group, the maker of the Bushmaster rifle used in the shootings in Newtown, Connecticut? Cerberus Capital Management, a major New York private equity firm, announced today that it is putting its controlling stake in Freedom Group up for sale. The Cerberus executives are no squeamish liberals. Its founder and CEO, Stephen A. Feinberg, is an avid hunter. Its executives have contributed hundreds of thousands of dollars in recent years to Republican candidates, including Ben Quayle, whose father, the former vice president, serves on Cerberus' board. But apparently, the firm decided that the elementary-school massacre was just too large a blot on Freedom Group. It surely doesn't help that Feinberg's father lives in Newtown.

A sale under these circumstances presents a perfect investment opportunity. Herewith, then, is a helpful buyer's guide to some important features about Freedom Group, based on official company filings. In addition to Bushmaster, the company makes the storied Remington rifle and several other major brands. It sells more than 1 million rifles and shotguns per year. It employs 3,000 people and its manufacturing facilities are in upstate New York, Kentucky and Missouri; only the New York plant is unionized. In 2011, the company registered $775 million in sales -- still down from its pre-recession peak, but a $30 million increase over the year prior. Some other features to consider:

1. Suburban sprawl is a bummer. In its third quarter filing this year, the company warns investors that sales could be hurt in the years ahead by the resurgence in residential construction. "The development of rural property in many locations has curtailed or eliminated access to private and public lands previously available for hunting, and the continuation of the development of rural property could materially adversely affect our industry as well as our business and results of operations."

2. Men are as insecure as ever. On the upside, though, firearms makers such as Freedom Group have in recent years managed to offset the decline in demand from bona fide hunters by marketing military-style guns to men more interested in impressing their dears than tracking deer. The euphemism for this category is the "modern sporting rifle," and Freedom Group is all over it. From its 2011 annual report: "The Bushmaster and DPMS brands, established in 1973 and 1986, respectively, represent the largest and second largest designers and suppliers of modern sporting rifles, components and parts for the commercial market. Bushmaster was one of the first companies to introduce modern sporting rifles to the consumer market, a market that is growing faster than the general firearms industry." This shift away from the hunting market to the self-image market is what led Freedom Group to produce an ad campaign which casts buying the Bushmaster .223 as restoring one's "man card." Most unfortunately, the campaign includes one ad that defines "unmanliness" as being a man who "avoids eye contact with 5th graders."

3. Wal-Mart, baby. If you have a problem with Bentonville behemoth, you might want to stay away, because Wal-Mart's pretty central to the Freedom Group business model. From the third-quarter report: "Sales made to Wal-Mart accounted for approximately 13% of our total sales for both of the nine months ended September 30, 2012 and 2011, and 13% and 14% of our accounts receivable balance as of September 30, 2012 and December 31, 2011, respectively. Wal-Mart, together with another customer, accounted for approximately 17% and 21% of our accounts receivable balance as of September 30, 2012 and December 31, 2011, respectively. Our sales to Wal-Mart are generally not governed by a written long-term contract between the parties. In the event that Wal-Mart were to significantly reduce or terminate its purchases of firearms, ammunition and/or other products from us, our financial condition or results of operations and cash flows could be adversely affected." And indeed, this week Wal-Mart announced that it was removing the Bushmaster .223 from its shelves. Who knows how long this will last -- presumably, a few bribes could at least ease things south of the border -- but for now, it's a definite downer.

4. One word: bullets. You know how Gillette gets you on the razor blades more than the razors themselves? Firearms sales aren't much different. Guns need bullets, and luckily, Freedom Group is the dominant player in that market, racking up nearly as much in ammunition sales as it does from guns themselves. From the 2011 annual report: "We sold approximately 2.0 billion rounds of ammunition during the twelve months ended December 31, 2011, making us the largest manufacturer of commercial ammunition in the United States. The NRA estimates that as of 70 to 80 million people in the United States owned approximately 300 million firearms in 2010, creating a large installed base for our ammunition products. As the only major supplier of both firearms and ammunition in the United States, we believe our ability to sell ammunition creates a unique competitive advantage within the industry allowing us to solidify and extend our existing long-term relationship with our loyal customer base." Got that? Two billion bullets.

5. Women and young men. Again, the gray-haired hunters may be dying off one by one, but there are growth markets to exploit--specifically, women and young men who like big guns like the Bushmaster. From the 2011 annual report: "We believe that a meaningful percentage of recent firearm sales are being made to first time gun purchasers, particularly women. The introduction of first time shooters, as well as renewed interest by many existing shooters, will translate to increased participation across the ever-widening array of shooting sports. In addition, the continued adoption of the modern sporting rifle has led to increased growth in the long gun market, especially with a younger demographic of users and those who like to customize or upgrade their firearms." If anyone doubts this claim, consider two names recently in the news who fit this marketing profile exactly: Nancy and Adam Lanza.

6. Barack Obama's good for business. For a guy who wants to shut down the gun industry, President Obama's sure good for sales. He's even helping business by winding down the wars overseas. From the 2011 annual report: "We believe the continued economic uncertainty and the 2012 presidential election is likely to continue to spur handgun and certain rifle sales. Additionally, returning military are likely to purchase firearms for recreational use and to maintain training. We believe the industry is experiencing trends more toward recreational and shooting sports and home defense, in addition to the traditional hunting market."

7. Bureaucratic hassles. No doubt about it, when you're making guns, you have to fret about at least the prospect of government regulation. From the 2012 third quarter report: "Changes in regulation could materially adversely affect our business by restricting the types of products we manufacture or sell or by imposing additional costs on us or our customers in connection with the manufacture or sale of our products. Regulatory proposals, even if never enacted, may affect firearms or ammunition sales as a result of consumer perceptions. While we do not believe that existing federal and state legislation relating to the regulation of firearms and ammunition had a material adverse effect on our sales, no assurance can be given that more restrictive regulations, if proposed or enacted, will not have a material adverse effect on us in the future." Yes, this one could be a problem, and the 2011 annual report identifies two areas of regulation that could be particularly costly: a re-imposition of the assault weapons ban and various proposals to require data systems and stamping to better track firearms. But you have to at least admire the company's candor: there are no shortage of rules and regs around gun sales today, but Freedom Group has the honesty to admit publicly that these do not have "a material adverse effect on our sales." 

8. Legal liability. More candor: "As a manufacturer of firearms, we were previously named as a defendant in certain lawsuits brought by municipalities or organizations challenging manufacturers‘ distribution practices and alleging that the defendants have also failed to include a variety of safety devices in their firearms. Our insurance primarily excludes coverage regarding such claims. In the event that additional such lawsuits were filed, or if certain legal theories advanced by plaintiffs were to be generally accepted by the courts, our financial condition and results of operations could be adversely affected." No getting around this one. Back in 2004, Bushmaster, then an independent company, paid $568,000 as part of a settlement related to the Beltway snipers, who used a Bushmaster .223. Odds are that there'll be a lawsuit or two coming of Newtown.

9. The whims of fate. Let's face it, the firearms business is not the razor business. There's a fundamental uncertainty to it that other lines of sales don't have to deal with. In other words, caveat emptor. From the third-quarter report, which was released on September 30, not so long ago at all: "Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this quarterly report."

Yes, events or circumstances.

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