Is Smith & Wesson Holding Corp Destined for Greatness?

Let's see what the numbers say about Smith & Wesson.

Jul 2, 2014 at 5:05PM

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Smith & Wesson (NASDAQ:SWHC) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Smith & Wesson's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Smith & Wesson's key statistics:

SWHC Total Return Price Chart

SWHC Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

74.4%

Pass

Improving profit margin

162%

Pass

Free cash flow growth > Net income growth

99.7% vs. 208%

Fail

Improving EPS

208.3%

Pass

Stock growth (+ 15%) < EPS growth

328.2% vs. 208.3%

Fail

Source: YCharts. *Period begins at end of Q1 2011.

SWHC Return on Equity (TTM) Chart

SWHC Return on Equity (TTM) data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

187.9%

Pass

Declining debt to equity

(28.8%)

Pass

Source: YCharts. *Period begins at end of Q1 2011.

How we got here and where we're going
Smith & Wesson's performance has almost held up since we first examined it last year, as the gun maker finished with a strong five out of seven possible passing grades in its second assessment, down one passing grade from 2013. The one new falling grade only occurred because Smith & Wesson's net income growth has shot past the growth of its free cash flow; but for the second year in a row, the company's share-price gains have advanced beyond its EPS growth during our three-year tracking period. Will Smith & Wesson be able to grow both earnings per share and free cash flow at the rates necessary to earn a rare perfect next time around? Let's dig a little deeper to find out.

Smith & Wesson investors have enjoyed one of the market's best share-price growth rates during the past few years, as the company has been trouncing Wall Street's expectations for revenue and earnings per share since nearly the start of our three-year tracking period. The company recently outperformed analyst projections for both its top and bottom lines in its fiscal fourth quarter, which, as always, is primarily due to the spike in sales that seems to occur every time political commentators begin muttering about the imminence of tighter gun regulations in the United States.

However, Smith & Wesson's downbeat guidance for fiscal 2015 has finally given investors some reasons to be skeptical about its potential, because this is the first time in a while that the company has produced such underwhelming estimates. Despite these near-term challenges, Smith & Wesson's management still expects revenue to grow by between 8% and 10% over a longer timeline, as the company's sterling brand could help snatch market share from other gun manufacturers in a tighter sales environment. My fellow Fool writer Dan Caplinger notes that Smith & Wesson ought to be able to outperform fellow gun maker Sturm, Ruger if demand for firearms returns to more normal levels.

On the other hand, decreasing background-check volumes and weakening sales at sporting-goods retailers have raised concerns that gun demand might have already peaked. Alliant Techsystems has recently spun off its firearms and sporting-goods business to insulate its core operations from this unwelcome trend. Despite this potential headwind, Wedbush analyst Rommel Dionisio recently upgraded Smith & Wesson to buy from hold, and raised his price target to $20 from $13, citing humongous upside for Smith & Wesson's recent handgun launches, including the M&P Bodyguard 380, which has fared well in jurisdictions permitting small-frame/concealed-carry pistols and revolvers.

According to a new Harris Poll, the firearms restrictions are supported by more than three-quarters of Americans, which could produce stricter gun legislation in the U.S. However, fear of restrictive gun legislation has been an easy bogeyman that the industry has thus far used to send its customer base scurrying to gun stores. Barring a much firmer commitment to reform on Capitol Hill, Smith & Wesson's growth should be reasonably secure for the upcoming quarters. With shares currently trading at a low forward P/E ratio of 10, there are still plenty of viable opportunities to bet on Smith & Wesson's continued momentum.

Putting the pieces together
Today, Smith & Wesson has many of the qualities that make up a great stock; but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Is Apple's next smart device destined for greatness?
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Alex Planes has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers