Arms-maker Smith & Wesson (NASDAQ:SWHC) fires off its first quarterly report of the new fiscal year tomorrow afternoon. Will it overshoot the mark, as it did in last year's Q1? (Investors sure hope so.)

What analysts say:

  • Buy, sell, or waffle? Half a dozen analysts have a grip on S&W, where buy ratings outnumber holds 5 to 1.
  • Revenue. On average, they're looking for sales to shoot 51% higher, to $71.9 million, supercharged by the firm's January acquisition of complementary business Thompson/Center Arms.
  • Earnings. But profits are only predicted to rise a single penny, to $0.09 per share.

What management says:
You have to look long and hard to find a company that does a better job than S&W at laying out its business story both frequently and in detail. In the firm's latest investor presentation, released in June, management sketched out the picture thusly:

  • S&W is currently the market-share leader in revolvers.
  • It's No. 3 in pistols (and closing in rapidly on No. 2, with sales up 60% year over year in 2006).
  • And it's now firmly ensconced in the "long guns" (rifles and shotguns) market -- which is twice as big as the one for handguns.

Looking forward, management implies that it won't be content to stop there. Commissioning a survey in 2004 to find out what brands consumers intend to purchase from, S&W made a point of including two as-yet-unaddressed markets: ammunition and security systems. If you're wondering how those two made their way into the survey ... well, keep an eye out for future press releases.

What management does:
After rising for more than a year, gross margin slipped a bit last quarter, as raw-material costs outran sales growth. The company kept a good handle on its operating costs, however, holding growth in selling, general, and administrative costs to just 41%, and allowing the operating margin to grow in consequence. Higher interest payments on its debt, however, as well as restructuring charges, pulled the net right back down.

Regardless, S&W still boasts higher gross and operating margins than does archrival Sturm, Ruger (NYSE:RGR). Less comparable high-tech weapons firms such as Taser (NASDAQ:TASR), Metal Storm (NASDAQ:MTSX), and Ionatron (NASDAQ:IOTN) have margins that differ widely from the two publicly traded "legacy" firearms makers -- Taser to the upside, Metal Storm and Ionatron to the down.

Margin

1/06

4/06

7/06

10/06

1/07

4/07

Gross

29.7%

31.0%

32.3%

32.6%

33.5%

33.4%

Operating

9.2%

10.5%

10.4%

11.7%

12.1%

12.6%

Net

4.4%

5.4%

5.3%

6.1%

5.8%

5.5%
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 good as things look already, S&W has promised even better news in the current fiscal year. According to the guidance issued in June, the firm is shooting for $330 million in sales this year, $28 million in net profits (so an 8.5% net margin, or a 300-basis-point improvement over last year), and $0.62 per share.

If achieved, those targets will equate to a nearly 40% improvement in sales, and about a doubling of per-share profit. Nice, but probably unsustainable in the long term. Actually, analysts predict that S&W will slow down its earnings growth dramatically, and soon, to the (albeit still fast) rate of 22% per year. Personally, I think that makes the stock look rather pricey, since it's already trading at 67 times trailing earnings. But if you choose to flip the safety and zero in on this one based on the numbers it's produced so far, I really couldn't blame you.

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