Is Smith & Wesson Troubled by Security?

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.


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  • Report this Comment On October 01, 2011, at 5:18 PM, kahunacfa wrote:

    Currently a buyer of SWHC. A decade-long holder of a new large position in Sturm Ruger (RGR) with a four dollar per share cost.

    Firearm sales will continue to do well as long as the current President stays in office. The Democratic Administration <b>IS NOT</b> firearm friendly.

    A couple of years ago, the Supreme Court ruled on the Second Admendment that it is an individual right to keep and hold firearms. -- We all knew that was the case in our hearts. Now it is official.

    Kahuna, CFA

    Venture Capital

    Portfolio Manager

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