What's Not to Like About Smith & Wesson?

Gun maker Smith & Wesson (NASDAQ: SWHC  ) reported earnings last night -- and the crowd went wild. But why?

After all, for its second quarter of fiscal 2014, the gunsmith reported several disturbing numbers. Starting at the top, quarterly sales increased a mere 2% in comparison to second-quarter 2013. That's a pretty far cry from the "30% annualized profits growth" that analysts have been telling investors to expect from S&W over the next five years. And the news didn't get much better from there:

  • Net profits for the quarter declined 20% year over year, to $17 million.
  • Profits per diluted share dropped 10% to $0.28 -- despite a 10% reduction in share count.
  • Free cash flow turned negative, erasing last quarter's positive performance and pushing S&W $2.1 million into the red.

So what's to like about that? Why were investors bidding the shares up by more than 4% in midday trading?

Hope springs eternal
Well, there are at least a few reasons for optimism. For one thing, if Smith & Wesson's numbers were worse than what it reported last year, they did at least exceed expectations. Revenue edged out analyst estimates. Profits "beat estimates" by a good $0.07 per share.

And looking out across the next six months, S&W management stuck to its guns on full-year guidance. Sales are still expected to come in between $610 million and $620 million, right on target with analyst expectations. Profits per diluted share from continuing operations should still exceed $1.30.

Plus, things may not be as bad as they look on the sales front. One big reason Smith & Wesson was unable to grow sales much was because the company has ceased distributing guns for Walther. That alone probably cost it more than $40 million in sales. Add in the missing Walther sales and S&W says revenue would have been up more than 9% in the second quarter.

Handgun sales are showing strength despite the lack of a tailwind from threatened gun legislation to push buyers into stores. Management says pistol sales in particular were up 27%. Finally, no longer depressed by the low-margin Walther distribution agreement, gross margin on S&W's guns soared 610 basis points to 41.6%.

Foolish takeaway
Flush with cash, and trading for a P/E ratio of less than 10, Smith & Wesson continues to look attractive. If there's one thing holding me back from buying, though, it's that lack of positive free cash flow. If and when S&W manages to get that little detail repaired, it should be open season on the shares.

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Comments from our Foolish Readers

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  • Report this Comment On December 11, 2013, at 5:30 PM, BARNSTORMER600 wrote:

    LIkely the most dishonest article published by Motley Fool, EVER.

    The Fool forgot to mention that the company lost eight days of production and shipping due to the SAP conversion, THE FOOL also forgot to mention that the quarter had a regular shutdown.

    But worst is its final conclusion regarding free cash flow. SWHC generates almost $200 million a year in EBITDA, its interest carry is just over $2 million, and it its large capital expenditures are entirely discretionary.

    So go ahead FOOL, wait until the company is making $400 million a year in EBITDA and see if you can buy shares at $12. Smith and Wesson is headed for $18.

  • Report this Comment On December 11, 2013, at 5:59 PM, BARNSTORMER600 wrote:

    Rich Smith the FOOL, compares sales with profits, and after a descrepancy declares a foul. Look here at his faulty reasoning:

    "Starting at the top, quarterly sales increased a mere 2% in comparison to second-quarter 2013. That's a pretty far cry from the "30% annualized profits growth" that analysts have been telling investors to expect from S&W over the next five years.""

    HUH? Really. He compared sales growth to the analyst estimates for profits, noticed a difference between the apples and oranges, and pounced.

    This guy must be paid to churn out articles, and on this one, he certainly got paid by the shorts.

  • Report this Comment On December 11, 2013, at 6:06 PM, BARNSTORMER600 wrote:

    Here is another idiotic miss from RICH THE WORDSMITH:

    "Net profits for the quarter declined 20% year over year, to $17 million."

    Correct statement, but last years net profits included a PAPER TAX GAIN of $5.6 million. Now factor in some one time charges in the quarter of about $ 4 million and the picture changes quite drastically. RICH THE WORDSMITH should have just looked at net income form Ops,added back teh $4 millionin one time charges and then wrote his story about a 30% increase in operating income - and that does not count the 8 days missed production from the SAP conversion!

    Long and short of this - Rich Smith is either in the bag for his short friends, or he is an english major with a math deficiency.

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