Foolish Forecast: Smith and Wesson's Ammo Dwindles

So let's see here. We've got two and a half wars raging in the Middle East. Another one is brewing down on the Colombia-Venezuela border. Al-Qaeda's resurgent in Pakistan. And the U.S. economy's in shambles. Think now might be a good time to go out and buy yourself a gun -- or at least, stock in a gun maker? Smith & Wesson (Nasdaq: SWHC  ) reports its Q3 2008 earnings tomorrow afternoon.

What analysts say:

  • Buy, sell, or waffle? Eleven analysts track S&W, giving it four buy ratings, five holds, and two sells.
  • Revenue. On average, they expect a bare 2% rise in sales to $55 million.
  • Earnings. Worse, the analysts predict S&W will lose $0.06 per share.

What management says:
Uh-oh. Remember how, three months ago, I described the series of earnings warnings S&W issued? Remember how $330 million in projected sales became $325 million, which in turn became $300 million? Well, after shooting itself in the foot with its own guidance three times in a row, management finally figured out (in January) that the best thing to do is stop squeezing the trigger. It hereby "does not confirm the guidance [it] gave on December 6, 2007, nor [does S&W] give any guidance at this time... [and] cannot tell you when [it] will again be able to give guidance."

What management does:
But in the absence of management commentary, perhaps you'll want to let the trends in the table below guide your thinking: Gross margins remain strong at S&W, but operating margins have slipped (although they're still superior to Sturm, Ruger's (NYSE: RGR  ) ), and net margins have been tumbling all year long. Little wonder the stock is down 60% over the past year.

Margins

7/06

10/06

1/07

4/07

7/07

10/07

Gross

32.3%

32.6%

33.5%

33.4%

34%

34.1%

Operating

8.9%

10.3%

11%

11.5%

11.8%

11.4%

Net

5.3%

6.1%

5.8%

5.5%

5.4%

5.1%

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:
January's investor presentation was curious for two reasons: First, the way the report's generally upbeat tone hit a sour note at the end, when S&W disavowed past guidance. Second, the way it showed many numbers going up -- but sales in particular trending sharply downward.

Culminating years of growth, S&W's fiscal Q4 2007 sales rose 59% year over year. But the end came swiftly. S&W stalled out at 56% in fiscal Q1 2008, then plummeted last quarter to 39%. Now, that's still a fine number, no doubt, but a trend of decreasing sales growth doesn't match up well with a trend of steadily lower profits on those sales.

This is starting to look like a "market saturation" story -- as in, we're reaching the point where almost everyone who wants a gun already has one. If that's the case, I see only two "outs" for S&W. Either it needs to first stem the erosion of its profit margins, and then find a way to get them growing again, or it needs to capitalize more on its brand, and expand its market through licensing deals. The firm's already selling S&W-branded knives through Sears (Nasdaq: SHLD  ) , and shooting-safety equipment at Wal-Mart (NYSE: WMT  ) . Come to think of it, considering how high-margin licensing revenue can be, this may be the one solution that solves both of S&W's problems at once.

What did we expect out of S&W last quarter, and what did we find when we checked the chamber? Read about it in:


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 591910, ~/Articles/ArticleHandler.aspx, 8/31/2014 4:26:19 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement