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.

Beat 
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.

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