Here's Why Smith & Wesson Shot Up 5%

Shares of Smith & Wesson (NASDAQ: SWHC  ) rose more than 5% during intraday trading Friday, after the gunmaker announced a significant new share-repurchase plan along with the release of solid preliminary fiscal fourth-quarter and full-year 2013 results.

Smith & Wesson stock

Image source: Smith & Wesson

A record quarter
For the quarter, net sales rose 38% from same the year-ago period to $179 million, while GAAP net income grew an even more impressive 63% to a record $0.44 per diluted share.

For the company's fiscal 2013 year, preliminary net sales came in at $588 million, or an increase of around 43% over fiscal 2012. Meanwhile, preliminary GAAP net income is roughly $1.22 per diluted share, or more than triple the $0.40 per share Smith & Wesson earned in the previous year.

When all was said and done last quarter, Smith & Wesson also noted that it ended the current fiscal year with a cash balance of $100.5 million. For those of you keeping track, that's roughly 16% of its entire current market capitalization.

I suppose this shouldn't come as a huge surprise, especially considering arms and ammunition manufacturers such as Smith & Wesson, Sturm, Ruger (NYSE: RGR  ) , and Olin (NYSE: OLN  ) have benefited from unprecedented demand for their products, which, according to comments from Olin management last quarter, began the Saturday before Election Day last year.

Equally unsurprising, and as I wrote back in April, gun-industry stocks had outperformed the broader market since then -- that is, at least until they were reined in after fears of waning demand hit as the crucial background-checks amendment to President Obama's gun legislation was shot down in the U.S. Senate less than two months ago, effectively leaving the gun bill dead in the water. 

Even so, when we look at gun stocks' returns since demand spiked last November, they've still largely managed to at least keep pace with the broader market. Until now, however, the one notable exception has been poor Smith & Wesson, which previously suffered on the heels of comparatively weak earnings when they couldn't meet demand:

SWHC Total Return Price Chart

SWHC Total Return Price data by YCharts

Now, however, according comments from Wedbush Securities analyst Rommel Dionisio, Smith & Wesson is finally catching up, thanks primarily to their efforts of running at manufacturing capacity to meet the record demand.

Increasing your slice of the pie
What's more, in a separate press release, the company also outlined plans to exchange its current debt -- which is consists of $42.8 million in 9.50% senior notes due 2016 -- for $75 million in lower-interest 5.875% senior notes due in 2017. In total, the transaction will result in net cash to the company of around $25 million, which Smith & Wesson CEO James Debney stated will be used to make "strategically opportunistic" investments.

In addition, the press release also announced that the company's board of directors has approved a new $100 million stock-repurchase program, which will replace the $15 million still remaining under Smith & Wesson's previously approved $35 million repurchase program announced last December.

More specifically under the new plan, $75 million will be repurchased by way of a fixed-price issuer tender offer at $10.00 per share, or around 2% above Friday's closing price of $9.78 per share. On another encouraging note, Smith & Wesson also indicated that "none of the company's executive officers or directors will tender any portion of their shares in the tender offer," so investors can rest assured this isn't simply a roundabout way for management to cash out.

As for the remaining $25 million, it will either be repurchased in the open market or through privately negotiated deals with shareholders. In all, considering the company's current stock price and depending on the number of shares ultimately repurchased, this buyback plan could potentially reduce the number of Smith & Wesson shares outstanding by as much as 15%.

Foolish final thoughts
In the end, I can't blame the folks at Smith & Wesson for wanting to buy back their stock. After all, even after Friday's pop, it still trades at a mouthwatering 10 times last year's earnings, and only nine times next year's estimates. Past weakness or not, Smith & Wesson stock simply looks too cheap to ignore.

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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.

  • Report this Comment On June 20, 2013, at 6:48 AM, prginww wrote:

    Bennies whizzed at all the criticism and Obama's naysaying, so he's reeling back the recovery by announcing stimulus rollback NINE MONTHS EARLY!!!

    SWHC shines at low PE and soaring sails, running, full bore (sorry).

    Contrarily, silver is being sold off by ten percent these past two days.

    Even butter isn't doing as well as guns, and rightly so.

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