Smith & Wesson Jams

Smith & Wesson's (Nasdaq: SWHC  ) earnings report last week wasn't the sort of news you'd expect to spark a 14% surge in stock price -- at least not on the surface.

Net profit for the fiscal fourth quarter of $0.02 per share dropped by half in comparison with last year's Q4. While S&W beat earnings, it had to rely on adjusted earnings that exclude charges to do so. (Adjusted earnings per share are expected at $0.06.) What's more, such charges subtracted $1.44 from S&W's take for the year, resulting in a fiscal 2011 loss of $1.37 per share.

So that's not really great news -- again, on the surface. To see why S&W is surging, you have to dig deeper. On the cash-flow statement, for example, we find S&W generating nearly $19 million in free cash flow for the year just ended. That's quite a lot of money for an enterprise currently valued at just $247 million. It gives the stock an EV/FCF ratio of 13, which is in turn quite a low number for a company that most analysts expect to grow at 14.5% per year over the next five years.

Gunning for growth
Speaking of growth, perhaps the best news we got last week was that S&W predicts fiscal 2012 revenues of about $430 million, or 10% higher than in 2011 (2011 was up from 8% from 2010.) Such growth looks lowball in light of a backlog that's increased 153% sequentially. Inventories are stable, and accounts receivable are down sharply in comparison with the year-ago quarter. This tells me S&W will be making a lot of new guns and probably selling them for strong margins over the coming quarters to keep up with demand.

What's sparking the demand? It's hard to be certain; management says it's strong across "nearly all firearm product lines." Adding fuel to the fire, I suspect, are new concealed-carry gun laws in Wisconsin, Wyoming, and Ohio, that may be encouraging buyers to purchase smaller handguns. This could be especially good news for S&W rival Sturm, Ruger (NYSE: RGR  ) , whose LCP .380 compact handgun consistently ranks among the hottest sellers at online gun superstores. It further suggests strength in coming quarters at ammunition makers such as Olin (NYSE: OLN  ) and Alliant TechSystems (NYSE: ATK  ) , and at guns 'n' ammo retailers such as Cabela's (NYSE: CAB  ) and Dick's Sporting Goods (NYSE: DKS  ) .

For the record: Ruger, Olin, and Cabela's report later this month. Expect numbers from Dick's and Alliant in August.

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Fool contributor Rich Smith has no position in any stocks named above, but Motley Fool newsletter services have recommended buying shares of Cabela's.

We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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