Smith & Wesson Undervalued On Long-Term Prospects

Investors became gun-shy last week as Smith & Wesson (NASDAQ: SWHC  ) delivered a stellar quarter but looked timid on guidance. The firearm maker has seen shares rise more than 275% over a two-year period, but with the bulk of those gains going further and further away in the rearview mirror, the market and investors appear doubtful that the company will grow at its projected rate. Yet, as most Americans know, guns are a big business with demand that seems to rise no matter what. Trading at a seemingly discounted eight times forward earnings, Smith & Wesson may hold compelling upside to price-conscious investors.

In the recently ended quarter, Smith & Wesson trumped not only the Street's expectations, but apparently internal estimates as well. The company had previously guided for earnings of $0.37 per share on net income of $165 million, but came up ahead at $0.40 per share and $171 million. These sales represented a 26% gain over the prior year's results.

In the United States, gun owners tend to buy more guns when there is threat of restricting legislation, and then continue to buy guns once that legislation fails to pass. During election years, gun stocks can fly high on either Democrat or Republican outcomes -- one suggesting more gun control (read: buy up all the guns), while the other is more NRA-friendly. Politics aside, it's safe to say firearms makers are comfortable in the United States.

As fellow Fool Rich Smith recently reported, the industry as a whole is pegged to grow at 13% annually for the next five years. Smith & Wesson is projected to roughly double that number over as much time. Perhaps, though, the market is somewhat unconvinced, as the stock sank fast last week when management failed to provide upbeat guidance for the remainder of the year. Despite this past quarter's stellar performance, the company decided to stick by its aim of $1.30 to $1.35 per share for the full-year 2013.

Gun(g) ho 
The company trades at just 8.12 times forward earnings -- odd for a stock projected to grow at nearly 30% for five years. One of its competitors, Sturm, Ruger, is a larger company and set to grow slower, yet trades at more than 15 times forward earnings.

Concern seems to be that the gun-buying frenzy is over. That may be true in the short to medium term, but there is little evidence of a long-term drop-off in the firearm market. Even if Smith & Wesson's earnings growth was more akin to the industry's 13%, that still provides plenty of upside given its current valuation.

Though not the most socially conscious stock to own, or even in the top 500, Smith & Wesson is a seemingly cheap stock with strong potential for capital appreciation and multiple correction over the long term.

More from The Motley Fool
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Read/Post Comments (0) | Recommend This Article (2)

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: 2628497, ~/Articles/ArticleHandler.aspx, 9/28/2016 10:14:22 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 26 minutes ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 12.84 0.24%

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

9/28/2016 4:00 PM
SWHC $26.00 Up +0.14 +0.54%
Smith and Wesson H… CAPS Rating: ****
RGR $57.26 Up +0.59 +1.04%
Sturm, Ruger and C… CAPS Rating: ****