The US firearms industry’s economic significance is overestimated by both sides of the gun controls debate. Laws and regulations will be determined by the sentiments of the American political tribes, not gunmakers’ financial power.

Having said that, shares in the manufacturers of handguns, shotguns and “modern sporting rifles” such as the old AR-15 had a pretty good run from July 2020 to early this year. But now it looks like they are reverting to type: low-tech metal benders with subnormal valuations.

Many of the great American gun-making names, such as Remington, Winchester, Colt and Marlin, have had at least one trip to bankruptcy courts. The two pure play gunmakers left, Sturm, Ruger & Co and Smith & Wesson Brands, have underperformed the broader indices, even though their sales hit all-time records in January.

Both companies have, arguably, survived in their present form by cranking out minor variations on existing brands and avoiding high financial leverage. American defence companies such as Lockheed Martin or Raytheon are constantly working on product innovation, with both taxpayers’ and shareholders’ money.

But as Sturm, Ruger & Co says in its last 10-K filing, it “does not consider its business materially dependent on patent or trademark protection”. Research and development expenses at both companies just tick over year by year at less than 2 per cent of sales. And why should they bother? The government would not allow them to sell scientifically advanced weapons to the public.

Private equity managers have had their try at leveraging up gunmakers’ mature assets. The last one was Cerberus and its takeover of Remington Arms, which failed in 2018. Bankers and lenders may have become more fastidious, and the two public companies have been financially prudent.

And they should be. Boomlets such as last January’s 79 per cent year over year increase in US firearms sales are generally followed by quick declines. For example, after the production of almost 11.5m firearms in 2016, manufacturing fell back to 8.3m in 2017.

Production and sales were certainly much higher in 2020. Small Arms Analytics, a US-Canadian consultancy, estimated there were 23m “units” sold in 2020, which it said represented a 24 per cent increase over 2019. The National Shooting Sports Foundation, an industry trade association, said the “direct economic impact” of the industry was $25.5bn. That is not a material fraction of the $21tn US economy.

And however extensive the rights conferred by the US constitution’s Second Amendment, they do not include the right for gunmakers to earn a profit. In recent years, the process of natural selection has been working for Smith and Wesson and Sturm, Ruger & Co.

According to Sturm, Ruger & Co’s most recent SEC disclosures, on $568.9m of sales in 2020, the company earned net income of $90m, for a near-33 per cent return on equity. It would seem the company believes shareholders are better off getting that cash themselves, since it paid out higher dividends than it earned in profit, without taking on more debt.

Smith & Wesson is also inclined to pay out cash to its shareholders. In its third quarter, which ended on January 31, it earned a net income of $62m on sales of $257m, completed a $50m share buyback and paid out a dividend yield of a bit over 1 per cent.

They are probably using good judgment in letting the shareholders get cash now rather than later. Whatever the final outcome of the Biden administration’s gun control regulatory initiatives or Republican state legislators’ liberalisation of “private carry” laws, guns will be a tough business in the future.

To begin with, brand loyalty is not everything, as the former shareholders of Colt, Remington and Winchester could tell you. The proportion of Americans who are gun owners has been declining, even though the remaining customer base tends to own more firearms per capita.

The barriers to entry are not that high. The Bureau of Alcohol, Tobacco, Firearms and Explosives, which enforces federal firearms law, has licensed more than 13,000 firearms manufacturers and 1,900 ammunition manufacturers. By my calculations, you could set up a simple gun-making shop with less than $100,000 in (used) machinery.

With even moderate care, a gun can be perfectly functional for decades. So if gun-buying fever were to abate, the manufacturers could suffer. And then there is the attrition, natural or otherwise, of the customer base.