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Here's How Long Smith & Wesson Can Keep Growing

Gun investors rejoice, because shares of Smith & Wesson (NASDAQ: SWHC  ) popped as much as 7% Wednesday morning after the firearms manufacturer posted solid fiscal second-quarter 2014 earnings.

Quarterly sales rose 2% over the same period last year to $139.3 million, outpacing analysts' estimates for revenue of $137.5 million. What's more, keep in mind that last year's second quarter also included $9.7 million in Walther sales as part of a now-expired distribution agreement Smith & Wesson held at the time. Excluding that item, Smith & Wesson's revenue actually grew by 9.2% year over year, driven by impressive 27.4% growth in handgun sales.

Smith & Wesson M&P45 Handgun. Image: Smith & Wesson.

As a result, Smith & Wesson's net income from continuing operations grew by 16.7% to $0.28 per diluted share, thanks both to continued gross margin expansion from increased sales of its popular M&P pistols and to the company's recently completed efforts in repurchasing $100 million of its common stock. Analysts, for their part, were modeling earnings of just $0.21 per share.

When will the party end?
However, the biggest question remains: Just how long can Smith & Wesson keep this up?

Earlier this year my ears perked up when Joseph Rupp, the CEO of Winchester ammunition manufacturer Olin (NYSE: OLN  ) , confirmed that last year's incredible demand unsurprisingly began the Saturday before Election Day.

At the same time, and while Rupp suggested the current surge would likely last "well into the third quarter," he also insisted it "will end and we'll see a drop-off [...] in the 10% to 20% range over a two-year period."

Call me crazy, but it seems safe to say that what goes for Olin's ammunition should translate in large part to gun sales for manufacturers like Smith & Wesson.

Sure enough, here we are in Q4, and Smith & Wesson CEO James Debney just pointed out during the company's subsequent earnings conference call that NICS background checks were "essentially flat" over the same period last year. In fact, they declined 14% for the month of November, and those negative comps are expected to continue until at least April or May of next year.

But don't get me wrong: It's also prudent to look at longer-term trends given last year's rather exceptional results. Luckily for Smith & Wesson investors, it's encouraging to know that this year's adjusted NICS rates remain 19% higher than they stood this time two years ago.

All things considered, then, it doesn't look like the firearms industry as we know it will fall into obsolescence anytime in the very near future. If anything, though, this quarter should serve as a stark reminder that 2013's torrid pace of growth simply can't last forever.

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This doesn't automatically make Smith & Wesson a bad investment, but keep in mind that there are plenty of other great long-term stocks out there.

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9/29/2016 4:00 PM
SWHC $25.82 Down -0.18 -0.69%
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Olin Corporation CAPS Rating: ***