Smith & Wesson Holding Corp. Remains Locked and Loaded

The gun maker failed to shoot out the lights last quarter, but its business is still on target.

Jul 17, 2014 at 5:26PM

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Source: Smith & Wesson Holding.

Smith & Wesson (NASDAQ:SWHC) shot holes in investor enthusiasm with its fourth-quarter earnings report last month, recording falling sales and lower operating profits. With the likelihood of gun control legislation making it through Congress improbable, and the tragedies of mass shootings fading to the background, the impetus to buy a gun now is easing.

Various media outlets are reporting that gun sales are down, with CNBC suggesting they're down as much as 10%, but it's more nuanced than that. Smith & Wesson, for example, says rifle sales are down but handgun sales remain strong. That's in line with what CNN found, reporting that sporting rifle sales have returned to normal levels (and normal pricing, too) from where they skyrocketed to after the Sandy Hook tragedy in Connecticut in December 2012. Women, in particular, are finding handguns attractive for self-protection.

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That also proved to be the high-water mark for the industry too. Background checks performed by the FBI had been steadily increasing ever since President Obama was first elected, but his reelection two years ago and later the murder of dozens of schoolkids set off a frenzied drive to buy a weapon. If there was a time for gun control to gain traction, that was it, and gun owners and enthusiasts were trying to beat a deadline they could see counting down.

The resulting slowdown is seen in the results of sporting goods stores like Dick's Sporting Goods, which once again reported the boost its results got from its hunting section has since cooled with the passions of the moment passing. Cabela's as well felt the dramatic fall-off in demand, with declining firearms and ammunition sales causing same-store sales to plunge by nearly 22%. Of course, for those of us who've been stymied by the ammo shortage, the respite is sort of welcome, though Dick's still limits the amount you can buy in any one visit.

According to the FBI, while background checks don't necessarily translate one-to-one into gun sales, it's intuitive that someone going through the background check process will ultimately follow through if approved. In December 2012, 2.78 million background checks were processed, the most ever until that time, and it remains the apex today as well.

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Source: FBI.

Today the checks remain at elevated levels, compared to historical rates, anyway, but they're down 44% since March, when nearly 2.5 million checks were conducted, the second-highest amount ever. Still, June's 1.8 million checks is 8% above last year's total for the month and shows that while Smith & Wesson may have provided guidance that suggested sales were going to fall off the cliff -- it guided toward double-digit annual declines in sales last month -- things may not be as bad as they look and the gun maker's stock might not be as unattractive as it appears on first glance.

Comparing a business to its busiest period in its history when fear gripped its target demographic is going to skew the outlook. Yes, Smith & Wesson and fellow publicly traded gun maker Sturm, Ruger made out like bandits during the surge and were able to keep their factories humming -- Ruger actually had to stop taking orders at one point because it couldn't keep up -- and things are cooling off now. However, its business remains strong, its products are in demand, and it is more financially sound than it was.

For example, if you look at Smith & Wesson's backlog, it's dramatically lower than it's been, in fact, not covering even a half-year's worth of sales, let alone a full year. However, the gun maker's worked with its customers to get them to realign their own backlog with the current environment, and rather than have orders outstanding that will likely never be fulfilled, it's had them cancel their orders and redo their numbers. So it reflects a quality backlog number rather than an inflated order status.

We might want to see bigger, growing numbers, but Smith & Wesson is smart to realign with reality, and as investors that's something to take comfort in.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. 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.

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