The AK-47 Rifle: Made Within The USA

Smith & Wesson and Sturm, Ruger have a brand new rival.

Gun sales are surging in the U.S. of A. -- and Russia needs in on the action.

Kalashnikov USA's signature product. Image source: Kalashnikov USA.

Late last year, my fellow Idiot Rich Duprey ran down the most recent FBI report on background checks for purchasers desiring to buy firearms, declaring how on one single day -- Black Friday 2015 -- American gun consumers set a new report with the ATF, filing 185,345 official requests to buy weapons. On the face of it, that would seem to spell excellent news for U.S. weapons manufacturers Smith & Wesson (NASDAQ:SWBI) and Sturm, Ruger (NYSE:RGR). But it surely might also appeal to rising competitors.

Two years ago, as chances are you'll recall, Russia's invasion of Crimea in Ukraine sparked a wave of economic sanctions towards Russian firms deemed to be related to the invasion. Russia's Kalashnikov Concern, a subsidiary of arms exporter RosTekh, based on knowledge from S&P World Market Intelligence, was one such goal of the sanctions -- and that sophisticated the corporate's business mannequin of manufacturing AK-47s in Russia, importing them by means of its Kalashnikov USA subsidiary, and selling them here.

Final yr, Kalashnikov found a workaround to the sanctions, separating its USA subsidiary from the mother or father company and switching from an import business mannequin to manufacturing AK-47s locally in Pennsylvania. Demand for the weapons has been brisk, in no small part because of President Obama's own transfer to limit gun sales basically by executive order final month. But as Kalashnikov USA points out, one other issue that attracts customers to its weapons is the fact that, whereas many firms manufacture AK-47 look-alikes in the U.S. already, solely Kalashnikov USA makes an AK with real "Russian Heritage."

What it means for Smith & Wesson and Sturm, Ruger
That could make life uncomfortable for rival gunmakers Smith & Wesson and Sturm, Ruger. You see, in an try and capitalize upon the recognition of its guns, Kalashnikov USA is opening up a brand new manufacturing plant in Pompano Seashore, Florida.

The brand new plant will change a manufacturing operation that Kalashnikov shortly threw collectively in Pennsylvania in the quick aftermath of the sanctions last year. In Florida, the company will begin churning out official Kalashnikov-brand AK-47 models "by the second quarter of this yr," a Kalashnikov spokeswoman advised ForeignPolicy.com.

Because Florida operations haven't but begun, we do not but know what impact this will have on Smith & Wesson's business, or on Sturm, Ruger's either. It most likely won't be a huge disruption, because both of these companies get most of their revenues from handguns. Also, because neither S&W nor Ruger currently make an AK-47 look-alike, Kalashnikov's guns wouldn't compete straight with any of their very own fashions. But each S&W and Ruger do manufacture AR-15 variants, a popular different to the AK.

Thus, even when ar15 barrel is not a direct competitor, it's a competitor, and it's a competitor that seems to be rising. That would have an incrementally destructive impact on both S&W's business and Sturm, Ruger's.

In any event, it's a growth price watching -- and one we'll want to keep watch over should these corporations' earnings reports start to show indicators of weakness. In that regard: Keep tuned. Sturm, Ruger is scheduled to report earnings on Feb.