Smith & Wesson Holding (NASDAQ:AOBC) has a problem with one of its most popular rifles that could end up overshadowing the blowout earnings report the gunmaker issued earlier this month. It might not undermine the gains that ought to come from the surprise analysts are expected to register when gun demand surges next month, but it could become a larger concern if the gunsmith doesn't get out in front of it.
Handguns are hot
Much of the strength Smith & Wesson exhibited in its fiscal first quarter was due to the 38% surge in handgun sales, a segment that accounted for more than two-thirds of total net sales. In particular, its cheaper full-size polymer pistols, as well as the small, concealed-carry M&P-branded pistols, were responsible for the jump in sales, with revenues totaling $138.9 million for the period.
Although Smith & Wesson is recognized mostly for its handguns, it is also a major manufacturer of long guns. They might account for a much-smaller percentage of total sales, but they're growing in popularity, and in the first quarter, sales more than doubled, to $44.5 million.
The increase was mostly a product of the gunslinger's sporting-goods distribution channel. Having acquired Battenfeld Technologies in 2014, Smith & Wesson is using the division to diversify away from guns and into sporting goods and accessories, while also bringing its firearms into new channels. It's using the opportunity to gain market share in the long-gun market due to a shift in consumer preference toward modern sporting rifles, as it sells one of the most popular models in the category.
A modern take on a classic
Modern sporting rifles, or MSRs, are what gun-control proponents deceptively term "assault rifles." Although an MSR is virtually the exact same gun as any other semiautomatic rifle on the market -- including hunting rifles, which critics say they're not going after -- the fact they're clad in scary-looking accessories like barrel shrouds and extended grips and magazines, and have folding stocks allows opponents to demonize them for belonging to an especially dangerous category of weapons.
But they're quite similar to hunting rifles: They use the same ammunition; they have the same firepower; and you can fire only one bullet with each trigger pull, just like with hunting rifles. It's because they're tactically colored and look like military weapons that people not familiar with them think they pose a heightened risk.
Smith & Wesson sells one of the most popular MSRs on the market, the Model 15-22, something of a smaller version of the original ArmaLite AR-15 (the rifle most often impugned as being an assault rifle). It's a .22-caliber variant of the gunmaker's M&P15, making it a cheaper model to buy and operate. That's one of the reasons it became one of the favorite guns of shooters. Along with Sturm, Ruger's (NYSE:RGR) 10/22, perhaps the most ubiquitous .22 rifle in existence, these modern sporting rifles are big sellers, and demand for them is only growing.
Indeed, in its quarterly earnings report, Ruger credited the introduction of its new AR-556 in helping drive its sales higher in the quarter, accounting for one-third of the total.
A runaway train
That's why the problem Smith & Wesson has is of such importance. The 15-22 was just banned from use at rifle marksmanship programs offered by Project Appleseed, one of the premier training programs in the country and a peer to the National Rifle Association's safety program.
According to a memo issued by the organization, a series of misfires by the firearm has made it too dangerous to be used until Smith & Wesson offers a comprehensive repair.
The problem is twofold: Shooters have experienced both out-of-battery discharges, a situation in which a gun fires even though it has not returned to the firing position, and "runaway discharges," when the gun won't stop firing. Both situations are very rare, but the fact that several Project Appleseed classes have experienced them suggests there may be a manufacturing problem that needs correction.
The training program's memo warned:
As responsible Instructors, we have a duty to maintain safety at our events. If we know a rifle to be potentially unsafe, we shouldn't allow it on the line at all. At this time the least risk course of action would be to exclude the Smith & Wesson M&P 15/22 from future events until Smith & Wesson formally investigates the problem and issues an official corrective action.
Smith & Wesson needs to look into the issue immediately. The 15-22 rifle won't remain popular for very long if safety concerns become commonplace. There have been only a few instances of these malfunctions, but it shouldn't take a slew of them, or someone getting injured, for the gunmaker to finally do something about the issue.
Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.