Is Smith & Wesson Holding Corp Stock a Buy After Its Revenue Misfire?

Down nearly 14%, does Smith & Wesson deserve to be this cheap?

Aug 27, 2014 at 6:00PM

Smith Wesson

Lower demand for modern sporting rifles hurt Smith & Wesson's overall sales. Source: Smith & Wesson Holding Corporation.

Smith & Wesson's (NASDAQ:SWHC) namesake products might be deadly accurate, but that sure didn't help the gun-maker hit Wall Street's targets yesterday evening. To be sure, shares of Smith & Wesson Holding Corporation fell by 14% early Wednesday following the release of its mixed fiscal first-quarter 2015 results.

Specifically, Smith & Wesson saw quarterly revenue fall 22.9% year over year to $131.9 million. For that, we can mostly thank lower consumer demand for modern sporting rifles, which were responsible for a full 87% of the decline. However, Smith & Wesson's handgun sales continued to perform well, driven once again by strength in small polymer handguns. Meanwhile, Smith & Wesson repurchased another $30 million in shares during the quarter, which completed all share repurchases authorized by its board, but still translated to a 35% drop in net income per diluted share to $0.26.

Of course, that wouldn't have been so bad in isolation; analysts, on average, were expecting lower earnings of $0.25 per share on slightly higher sales of $133.9 million. 

The real reason Smith & Wesson stock hit the deck
But there's another reason investors are running for cover today: For the current quarter, Smith & Wesson sees revenue between $100 million and $110 million, and earnings per diluted share between $0.04 and $0.08. The mid-point of both ranges sits well below analysts' estimates, which called for earnings of $0.28 per share on sales of $136.8 million.

Smith & Wesson also lowered its full fiscal year 2015 guidance. As it stands, it expects net sales between $530 million and $540 million, with earnings per share between $0.89 and $0.94 -- both big drops from its previous guidance ranges, which called for fiscal 2015 revenue between $585 million and $600 million, and earnings per share between $1.30 and $1.40.

So, what happened? According to Smith & Wesson CEO James Debney, "We believe the current environment reflects high inventories industrywide resulting from channel replenishment that occurred following an earlier surge in consumer buying." Combine that environment with the firearm industry's typically slow summer season, and it's not hard to see why Smith & Wesson had no choice but to reduce guidance.

Then again, investors can take some solace knowing Smith & Wesson isn't alone. Given his "industrywide" comment, it should come as no surprise shares of competitor Sturm, Ruger (NYSE:RGR) simultaneously plunged around 4% today. 

Keep your eye on the (long-term) target
But there are a few silver linings, here. First, Debney says, is that today's high inventory levels should largely be restricted to the current quarter. After that, the market is expected to "return to a more normalized environment."

Even then, keep in mind one of Smith & Wesson's key strengths is its focus on manufacturing flexibility. By both maintaining a temporary workforce and outsourcing production of certain key components -- in stark contrast to the decidedly more permanent manufacturing infrastructure from Sturm, Ruger -- Smith & Wesson is able to more efficiently respond to unfavorable market conditions such as this. Sure enough, Debney confirmed during the subsequent earnings conference call that, "Now is the time to dial back these outsourcing arrangements, and we have begun that process."

At the same time, Debney insisted Smith & Wesson's strategy isn't to "simply react to the market, but rather manage our business for the long term in a manner that gives us the ability to take market share, independent of whether or not the market is growing or shrinking."

Foolish takeaway
But while previous quarterly comparisons in domestic unit sales to declines in NICS background checks made it possible to gauge the extent of Smith & Wesson's market share gains, management this quarter states high inventory levels and "noise in the channel" makes it more difficult to measure right now. Nonetheless, they assert the company's own internal monthly analysis shows Smith & Wesson remains the market leader in both handguns and modern sporting rifles.

Don't get me wrong: I can't blame the market for taking a big step back today given Smith & Wesson's big guidance reduction. But in the end, today's drop means shares of Smith & Wesson currently trade for an attractive 12 times the mid-point of this fiscal year's expected earnings. If this weakness proves temporary, as management claims, I think that makes Smith & Wesson stock a compelling buy for patient, long-term investors.

Warren Buffett’s worst auto-nightmare (Hint: It’s not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn’t one of them. He recently called it a “real threat” to one of his favorite businesses. An executive at Ford called the technology “fantastic.” The beauty for investors is that there is an easy way to ride this mega-trend. Click here to access our exclusive report on this stock.

Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. 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