Is Smith & Wesson Stock Still Worth Owning?

Smith & Wesson Holding Corp  (NASDAQ: SWHC  )  has had an impressive run over the past year. But after last week's post-earnings plunge, is it time to drop this gun maker from your portfolio?

To be sure, going into last Friday's fiscal fourth-quarter report, Smith & Wesson stock had risen a staggering 74% over the previous year. And with good reason: Smith & Wesson absolutely blew away analysts' expectations in each of its past four quarterly reports.

Smith & Wesson stock is taking market share from competitors like Ruger
Smith & Wesson has seen strong sales in its M&P line of handguns. Credit: Smith & Wesson.

Curiously, this time was no different. Though Smith & Wesson's quarterly sales actually declined 4.6% over the same year-ago period to $170.4 million, it still handily beat analysts' estimates for sales of $163.55 million. In addition, note that revenue would have declined only 1.5% had it not been for last year's sales of Walther products, which occurred under an agreement that has since ended. The result, Smith & Wesson says, is a reflection of continued strong handgun sales offset by lower long gun sales.

What's more, this translated to roughly flat net income of $25 million, or $0.44 per diluted share. Analysts, on average, were only looking for earnings of $0.39 per share.

Here's where Smith & Wesson missed the mark
Why, then, did shares plunge nearly 9% on Friday? Look no further than Smith & Wesson's weaker-than-expected guidance.

For the current quarter, Smith & Wesson sees net sales between $130 million and $135 million, which should result in earnings per share of $0.23 to $0.25. By comparison, Wall Street was modeling fiscal first quarter sales and earnings of $160.6 million and $0.40 million, respectively. To Smith & Wesson's credit, it did note that roughly one week of the company's annual two-week shutdown will occur during the first quarter, reducing production by roughly $6 million to $8 million. Even so, it still would have fallen short on the top line.

For the full year, Smith & Wesson expects sales between $585 million and $600 million, with earnings per share between $1.30 and $1.40. Once again, analysts were more optimistic, looking for sales and earnings of $619.6 million and $1.42, respectively.

What's an investor to do?
All things considered, then, this quarter serves as a reminder that the years-long gun boom is finally coming to an end. However, that doesn't (semi)automatically make Smith & Wesson a bad investment.

To the contrary, as management suggested in their follow-up conference call, Smith & Wesson continued to take market share from competitors like Sturm, Ruger as the market returns to more normal levels. Incidentally, shares of Ruger are "only" up 28% over the past year, and have fallen 17% so far in 2014 -- this despite Ruger also beating expectations with its most recent earnings report last month.

Smith & Wesson CEO James Debney noted that their domestic consumer unit sales in Q4 rose over 9%, all while NICS background checks fell by 20% over the same period from last year's unusually strong fiscal fourth quarter. Handgun unit sales led the charge, rising more than 30% year over year in contrast to an 11% drop in handgun-related NICS checks.

Foolish takeaway
In the end, investors do need to come to grips with the fact that firearms sales are returning to more normal levels. But even at normal levels, in Smith & Wesson we're still talking about a solidly profitable business taking share in a cutthroat market. And after last week's drop, Smith & Wesson stock still looks reasonably priced to me, trading under 1.4 times sales and around 11 times the midpoint of next year's expected earnings. Over the long term, I still think Smith & Wesson stock is worth holding.

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