Offering earnings guidance above analyst expectations is obviously a bullish sign, as over time earnings growth follows sales growth. And when a company predicts greater sales or profits, we expect its stock price to follow soon after.
Just last month gunmaker Smith & Wesson Holding (Nasdaq: SWHC ) said second-quarter earnings would shoot as much as 60% higher than expectations, as management was targeting profits in the range of $0.19-$0.21 per share.
Now don't go blindly buying on its bullish report -- you still need to do some research. Use the announcement as a jumping off point for additional research.
Smith & Wesson Holding snapshot
|Market Cap||$682 million|
|Revenues (TTM)||$456 million|
|1-Year Stock Return||294.3%|
|Return on Investment||24.4%|
|Estimated 5-Year EPS Growth||22.0%|
|Dividend & Yield||N/A|
In the crosshairs
Right or wrong, it's not partisan to admit that gunslingers Smith & Wesson and Sturm, Ruger (NYSE: RGR ) are coming out guns a-blazin' on the notion that a second term for President Obama will bring more and tighter gun control. We saw the same scenario play out in the 2008 election with sporting goods retailer Cabela's (NYSE: CAB ) reporting a 25% increase in gun sales right after the elections.
The script seems to be working just as well this time around with the argument being free from the restraints of having to face voters again this time around he'll really push for control.
First-quarter sales for S&W were 48% higher than a year ago and 5% more than in the fourth quarter. Adjusted profits were 245% higher than last year and gross margins widened by 9% over the first quarter, proving that not only is the gunmaker being helped by an external debate, but that its internal cost control measures are effective and it's leading to some impressive results.
While its military and police division continues to shoulder the bulk of Smith & Wesson's growth, consumer sales were also up a robust 30% seeming to lend credence to the "gun control is coming" argument. More importantly for the gunsmith, it took market share as sales widened from the 23% increase it recorded in the fourth quarter.
Targeting the wrong agenda
I'm not so sure about the conventional wisdom behind what is driving sales. I think it's more likely (or at least equally true) the souring economy, fear of growing crime, and need for greater security that is the motivation for higher sales. Even TASER (Nasdaq: TASR ) is seeing surging sales, with revenues jumping 33%, though most of its sales are to law enforcement and the military.
While gunmakers are doing great here, investors would be smart to question whether the pace is sustainable. S&W has been the start with its quadrupling in value of the past year, but Ruger's more modest 80% gain is nothing to sneeze at either. Can that torrid rate be maintained?
At least for the time being I'd say yes. FBI background checks for firearms purchases have soared 70% since 2007 and are up 12% so far this year from the prior period. While the law enforcement agency says there's no definite correlation between background checks and gun sales -- just as Smith & Wesson's backlog doesn't easily translate into sales -- one can still make the assumption that if more people are looking to buy guns, there will be more sales.
Shooting out the lights
Although S&W and Ruger are the only publicly traded gun makers, if we look at other peers in the broad aerospace and defense products group, like FLIR Systems (Nasdaq: FLIR ) , we see S&W still offers a compelling valuation at a multiple of just 10 times earnings estimates. FLIR goes off at 12 times forward earnings and Ruger at more than 15 times.
I've already rated it to outperform the broad market averages, but let me know in the comments box below if you think Smith & Wesson Holding is heading for another shootout at the OK Corral with analysts who see it fading.
Raise your sights
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