Smith & Wesson Aims to Win in the Long Run

Proving that over the long-term guns and ammo are a sure bet for investors, Smith & Wesson (NASDAQ: SWHC  ) is skyrocketing again based on strong earnings and guidance. Though the company took a hit last year with the end of a distribution agreement for its Walther firearm products, demand remains strong for all of its products, led by handgun brand M&P. Fundamentally, Smith & Wesson is a very strong business. The company has a beautiful balance sheet and has delivered a rare example of a well-executed buyback program. Topping off the thesis is a very comfortable valuation for investors.

Fired up
The highlight of Smith & Wesson's business continues to focus on the M&P polymer handguns, which saw 30% revenue growth in the past quarter. Companywide, net sales grew 16.7% to $145.9 million, after excluding the decreased sales from last year's expired distribution agreement. Operating expenses rose a little much, though it appears to be a short-term trend due to the implementation of the company's ERP business management solutions program.

Even with the slightly bruised operating margin, net income from continued operations came in at $0.35 per share in the third quarter of fiscal 2014, a huge gain from the year-ago $0.26 per share.

Full-year guidance encouraged investors further, as management bumped the numbers up to $615 million-$620 million in sales, with adjusted earnings per share in the range of $1.39-$1.42.

Why it wins
Smith & Wesson attracts polar opinions considering the heightened media attention to guns and regulation of firearms. The market seems to have a certain amount of regulatory risk baked into the stock, as even though it is growing at a brisk pace, the forward earnings ratio on the low end of the company's 2014 guidance is just 9.8 times.

Smith & Wesson has taken 20% of its outstanding shares off the table since late 2012. While buybacks are not all they're cracked up to be, this one is proving to add plenty of shareholder value, as the stock has appreciated 120% over a two-year period. The company's balance sheet is pristine, with a small cash pile of $45.3 million and zero long-term debt. The company allocates its capital among research and development and capital structure enhancement, while still delivering some free cash flow from operations.

Operationally and fundamentally, Smith & Wesson has a ton going for it and should appeal to value-oriented and growth-hungry investors. There is, of course, a chance for harsher regulations in the future, but investors should not be concerned in the meantime. The political implications of a wide-reaching overhaul of firearm laws are daunting for even the most ambitious liberal politicians. While the moral issues remain as strong as ever, a purely financial discussion of the business does not include substantial regulatory concern.

All in all, Smith & Wesson is an appealing long-term stock with tailwinds that won't die down anytime soon.

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