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Smith & Wesson Won't Replace the Beretta M9 -- Who Will?

By Rich Smith - Sep 27, 2016 at 6:13PM

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Believe it or not, the "official sidearm of the U.S. military" will almost certainly be built by a foreign company.

For investors, it's all over but the crying. Smith & Wesson (SWBI 2.12%) has been kicked out of the competition to replace the Beretta M9 as the U.S. Army's next handgun.


A company will build a replacement someday, but that company will not be Smith & Wesson. Image source: BERETTA.

As Smith & Wesson revealed in an 8-K filing with the SEC late on Friday, both S&W "and our partner in the pursuit of the U.S. Army's Modular Handgun System, or MHS, solicitation to replace the M9 standard Army sidearm have been notified by the Department of the Army that our proposal was not selected to advance to the next phase of the competition."

As we know from following this story over the past two years, the "partner" referred to is defense industry giant General Dynamics (GD -1.97%) -- so you can chalk up General Dynamics stock as collateral damage to this decision as well.

What it means to investors

Smith & Wesson stock closed for trading at $27.56 per share Friday, prior to the release of the company's 8-K filing. Since the news came out, the stock has lost 6.4% of its value. And yet, as Smith & Wesson emphasized in its filing, "the MHS program has never been included in our financial guidance."

Even though Smith & Wesson didn't include the MHS program in its financial guidance, investors still thought a win for the program was worth a lot to the company's stock.

As for S&W's partner, General Dynamics stock closed at $153.81 per share on Friday. But in contrast to Smith & Wesson stock, General Dynamics shares are trading higher on Tuesday than they did last week. That alone tells you how much more important investors thought this contract was worth to S&W than to its partner.

Why it means so much to investors

As I explained in past columns, replacing the Beretta M9 with a new weapon is going to cost a lot of money -- but exactly how much depends on how you look at it.

Replacing nearly 500,000 Beretta M9s with "MHSes" would have been worth about $580 million to Smith & Wesson and its partner, with the bulk of that loot going to S&W. Add in the likely value of ammunition contracts to feed all those weapons, and the contract is probably worth closer to $1.2 billion -- with the lion's share going to General Dynamics through ammunition contracts, plus its role in building the barrel.

That seems like a contract that should have affected General Dynamics' stock price more than Smith & Wesson's. But in fact, General Dynamics makes much more revenue than S&W in a given year ($31.2 billion for GD, according to S&P Global Market Intelligence data, versus just $782 million for Smith & Wesson). As a result, what appears to be a major opportunity lost to Smith & Wesson feels like little more than a flea bite for General Dynamics.

So now we know which company lost -- but which company will win the MHS contract?

At last report, about a dozen companies were believed to be bidding to replace the Beretta M9. The Army's plan was to whittle that field down to just three companies by August. According to reporting from IHS Janes, now that Smith & Wesson and General Dynamics are out, any of FN Herstal, Sig Sauer, Glock, Ceska Zbrojovka, and Beretta could still be in the running with various models of guns. We simply don't know which ones.

What we do know, however, is that none of the companies still competing for the MHS contract are based in the U.S. -- and none of them are publicly traded. So for investors, our interest in this contract has come to an end.

Whichever company wins, it won't be one we can invest in.

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Stocks Mentioned

Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
SWBI
$14.00 (2.12%) $0.29
General Dynamics Corporation Stock Quote
General Dynamics Corporation
GD
$213.50 (-1.97%) $-4.28

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