Will Smith & Wesson Get an Upgrade After Gun Demand Rebounds?

Despite fears that gun demand was waning, the latest FBI data shows it's as strong as ever -- as does Smith & Wesson's forecast of dramatic growth. Image source: Getty Images.

Now that gun demand has bounced back in September, will Wall Street upgrade their outlook on Smith & Wesson Holding (SWBI -0.60%) that they knocked down last month after it seemed demand was ebbing?

No let up in gun demand

For the 17th consecutive month, gun demand is at a record high. The FBI said it conducted almost 2 million background investigations on people wanting to buy a gun in September, 11% more than last year and more than it ever has before for the month. It's also 7% more than the number of criminal background checks the law enforcement agency recorded in August, when analysts thought the bottom was about to fall out of the gun market.

Of course, that wasn't the case at all, and gun demand remains as strong as ever. In August the FBI still conducted a record number of investigations, but they only increased 6% from the year-ago period rather than the double-digit growth rates it had been reporting. For Wall Street, that meant Smith & Wesson and fellow gunslinger Sturm, Ruger (RGR 0.37%) might be facing tough times in the future, despite neither company saying they were seeing a slowdown.

What they missed was an anomaly in the state-by-state numbers the FBI also publishes showing Kentucky, which typically averages about 320,000 checks per month, recorded less than 30,000 in August. That was because the FBI was undergoing a big computer upgrade and rather than scanning its entire database of gun permit holders as it usually does, it only reported new applications. The state's numbers rebounded in September as the state police said they would, with just under 300,000 criminal investigations reported for the month.

So while that makes it look like gun buying demand has returned, and Smith & Wesson's outlook ought to be rosy once again, in reality, there was no difference and individuals continue to buy guns at a record pace just as they have been doing.

No round in the chamber?

That's not to say there wasn't any easing in the numbers being reported by the FBI. The four biggest states in terms of the number of background checks conducted -- Kentucky, California, Florida, and Illinois -- all reported lower levels in September than they did in August.

Data source: FBI. *Kentucky only reported new applications, not all permit holder numbers.

Yet it's still not a cause for concern, even though Kentucky's figures are still lower than their average and despite last month's anomaly being largely resolved.

Another Kentucky anomaly

I spoke with the Kentucky State Police, who told me the reason the state's numbers were lower than usual in September was because they didn't go back online with the FBI until around Sept. 7 or 8, which means there's about a week worth of data not accounted for in the numbers.

Between the typical ebb and flow of new applicants and those permits that expire or aren't renewed, Kentucky reliably conducts some 300,000 to 320,000 investigations every month. Some periods that look low, like this past February when only 267,000 background checks were performed, was due to spring break and short staffing. Other months -- like July, when 363,000 investigations were done -- were because of a backlog they had as applications poured in and they had staff working overtime to process them all.

Data source: FBI. Chart by author.

So if we substitute Kentucky's average criminal investigations for the month of September, the national numbers are even stronger, at more than 2 million background checks, nearly just as many as the FBI has been reporting all year long.

Still on target

There's no need to worry that Smith & Wesson or Sturm, Ruger will face declining demand in the near future. Some individuals are likely still looking to protect themselves and their families as incidences of civil unrest, terrorism, and violent crime continue to occur.

Last month, Smith & Wesson upgraded its outlook for the coming year, saying it believes sales would continue surging and raising its revenue projections by 21% and adjusted profits by 28% to $2.48 per share.

Now that Wall Street's pessimism has been effectively undermined, and its stock remains some 15% below its 52-week high, Smith & Wesson is a stock investors ought to set their sights on.