Tic-tac-toe, investors want to know: After putting together back-to-back quarters in which it "beat" consensus estimates for its earnings, can Smith & Wesson Holding (NASDAQ:SWHC) make it three-in-a-row when it reports its fiscal second-quarter 2007 earnings tomorrow afternoon?

What analysts say:

  • Buy, sell, or waffle? All four analysts who follow the stock rate it a buy.
  • Revenues. On average, they expect sales to surge 37% in tomorrow's news, to $48.6 million ...
  • Earnings. . and for reported profits to more than quadruple to $0.09 per share.

What management says:
In September, just days after reporting fiscal Q1 results that exceeded expectations, Smith & Wesson filed an investor presentation with the SEC. Here's what management has to say for itself: It has the largest U.S. market share (45%) in revolvers, and the third-largest (11%) for non-revolver pistols. And the future looks even brighter. In a survey the company commissioned, asking prospective firearms purchasers what brand of weapon was most likely to be their next purchase, S&W was named the top choice not only in its market-leading revolver business, but also in pistols, and best of all, in the tactical rifle market that it just entered. If you assume the survey was on the up-and-up (remember, S&W paid for this survey), then that bodes very well indeed for it stealing market share from its rivals going forward.

Combine those prospects with what the firm has already accomplished over the last four quarters, in two of which it showed better than 20% sales growth, and two more better than 40%, and things are looking very good indeed.

What management does:
On the margins front, we see the firm beginning to enjoy the benefits of a scalable business, as rolling gross margins grew in each of the last two quarters, rolling operating margins sit comfortably above where they were a year ago, and rolling net margins also seem to be moving upwards (if more bumpily).

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

30.2

29.3

29.6

27.6

31.0

32.4

Op.

7.5

9.1

8.9

6.5

12.0

11.8

Net

4.2

5.0

3.7

4.4

5.4

5.3
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As S&W rapidly ramps its production, seeks new contracts, and begins to enter multiple new markets, it's crucial to monitor how well it manages its working capital. Cash flow has historically been a problem, but from the looks of things, it's beginning to work out the kinks. Examining the balance sheet over the last couple of quarters, I see that in comparison to sales growth of 45%, accounts receivable are outpacing that growth only slightly at 50% -- and given that the firm is dealing with a notoriously slow-paying U.S. government on some of its new contracts, I don't think investors need worry about the small discrepancy here.

Meanwhile, inventory trends are simply stellar. Ordinarily, we like to see inventories grow no faster than sales -- but at S&W, they're actually declining -- down 2% on average in comparison with the year-ago period, even as sales shoot through the roof. The company is selling guns as fast as it can build them.

Although free cash flow remains negative over the last 12 months, investments in building capacity to meet the rush of new product demand explains that. Operating cash flow is actually quite strong -- it's just that capital expenditures are eating up all the free cash flow. Over time, we'll want to see that trend reverse, for capex to slow down, while cash generation continues apace. Something to look forward to, tomorrow?

Competitors:

  • Law Enforcement Associates (AMEX:AID)
  • Mace Security (NASDAQ:MACE)
  • Sturm, Ruger (NYSE:RGR)
  • TASER Indusries (NASDAQ:TASR)

Suppliers:

  • Carpenter Technology (NYSE:CRS)

What did we expect to see at Smith & Wesson last quarter, and what did it produce? Find out in:

TASER is a Rule Breakers pick.

Fool contributor Rich Smith does not own shares of any company named above.