Is Smith & Wesson Troubled by Security?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Massachusetts-based gun maker Smith & Wesson (Nasdaq: SWHC  ) recently posted better-than-expected second-quarter results as demand for firearms increased during the period. However, the underperformance of its security service business weighed on profits.

Let's dip deeper.

The numbers
Revenue for the period increased to $99.2 million, a 4.5% increase from last year's second quarter. Despite that, net income saw a steep fall to $0.79 million, which is an 87% plunge over the year-ago quarter. This was primarily because of the bad performance of the security service division. Earnings per share were $0.01, just above break-even.

What paid and what pinched?
The firearm division, a major revenue earner for the company, recorded a good performance as its revenue -- $91.7 million -- grew by 18% because of increased demand for pistols and modern sporting rifles. Handgun sales also grew. Total consumer firearm unit sales were up by 44%.

The security service business, which provides 7.5% of total revenue, hurt quarterly income because of low government and corporate spending on security devices. Sales of this division fell to $7.5 million from $17.1 million last year.

Errant margins
Gross margin contracted by 5.6 percentage points to 28.4%. This is 2.5 percentage points lower than the five-year average, as noted by fellow Fool Seth Jayson. The company lags industry peers such as Sturm, Ruger (NYSE: RGR  ) , Ceradyne (Nasdaq: CRDN  ) , and Microsemi (Nasdaq: MSCC  ) in this area. Smith & Wesson needs to discipline its cost line to avoid profit "leakage."

The Foolish bottom line
S&W's management is looking at consolidating its operations and plans to add flexible manufacturing capacity in the hope of improving margins. In my view, security service will continue to hurt the bottom line, gross margins will continue its move southward, and guidance will fall short of analyst expectations.

Is the problem product or management? I'll examine that in my next take on the company.

To stay up to speed on this company and get my next take, click here to add Smith & Wesson to My Watchlist.

Navjot Kaur does not own shares in any of the above mentioned companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1555658, ~/Articles/ArticleHandler.aspx, 10/20/2016 3:40:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,182.32 -20.30 -0.11%
S&P 500 2,141.11 -3.18 -0.15%
NASD 5,243.58 -2.83 -0.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/20/2016 3:24 PM
SWHC $26.69 Up +0.19 +0.72%
Smith and Wesson H… CAPS Rating: ****
CRDN.DL $0.00 Down +0.00 +0.00%
Ceradyne CAPS Rating: ****
MSCC $38.22 Up +0.14 +0.37%
Microsemi CAPS Rating: ****
RGR $59.85 Up +0.30 +0.50%
Sturm, Ruger and C… CAPS Rating: ****