I agree with my Foolish colleague Rich Smith that Smith & Wesson Holding (NASDAQ:AOBC) is about to go shopping, but I think instead of buying another gun manufacturer, it has a different idea in mind.
Late last month, Smith & Wesson doubled the size of its revolving line of credit from $175 million to $350 million, while tripling the size of its existing credit facilities from $50 million to $150 million, actions that give it access to $500 million in financing, an ample cushion to make a big purchase.
Coming as it did just before the presidential elections, Rich was right to suggest it was done either in anticipation of an even bigger gun-buying boom than it's already enjoying as a result of a candidate who favored tighter gun restrictions potentially winning office, or Smith & Wesson was looking to shore up holes in its business. An acquisition of a rival gunmaker would certainly fit the bill, and having sufficient lines of credit to backstop its large and growing stockpile of cash would help it punch back any competitive bid by Sturm, Ruger (NYSE:RGR), which has an equally impressive balance sheet.
Taking up arms
It also wouldn't be the first time Smith & Wesson bought another gun maker. In 2007, it purchased Thompson/Center Arms for $102 million cash, a hunting rifle manufacturer with expertise in making long-gun barrels. Coupled with the introduction of its own modern sporting rifle, Smith & Wesson has since expanded its business into multiple segments of the long-gun market and perfectly positioned itself to capture the change in consumer preference for these firearms. It saw shipments of long guns more than double last quarter, far outstripping the gains it saw in higher handgun shipments, which rose less than 40%.
Beyond rifles, though, concealed carry weapons (CCW) are one of the hottest segments today, topping the list of most popular firearms on the market. The Smith & Wesson M&P Shield, designed specifically for the CCW market, always sits atop such lists. While other top manufacturers like Beretta, Glock, Ruger, and Sig Sauer all manufacture leading CCW handguns, their size might be prohibitive for Smith & Wesson to acquire. A company like Colt Manufacturing, however, which just exited bankruptcy earlier this year and has a popular Lightweight Commander version of the Model 1911 that's perfect for concealed carry, might be more within the realm of possibility.
Two storied handgun manufacturers combined to produce today's top firearms would be a formidable competitor.
The extreme outdoors opportunity
But while a firearms acquisition is one path Smith & Wesson could take, I think it's already signaled the road it's going to be heading down when it makes purchases: accessories and outdoors sporting goods.
Three times in the last six months the leading gunmaker has made an acquisition, and each time it's been for a business that supplements and extends Smith & Wesson's weapons-making capabilities rather than directly adding to it.
- On July 18, it purchased knife maker Taylor Brands for $85 million.
- On July 26, it purchase laser sight maker Crimson Trace for $95 million.
- On Nov. 4, it purchased camping and survival gear maker Ultimate Survival Technologies for $34 million.
And perhaps more significantly, just three days after buying the extreme outdoors equipment maker, Smith & Wesson said it was going to ask its shareholders to change the company name to American Outdoor Brands.
If Smith & Wesson is going on a shopping spree, it's going to be in this segment, bringing it closer in composition to Vista Outdoor and less like firearms pure-play Ruger. Vista is a major outdoors sporting equipment maker, but it also owns Savage Arms, a manufacturer of rifles and shotguns, as well as Federal Premium ammunition.
Small deals add up
Each of the recent purchases Smith & Wesson made were for less than $100 million, meaning its $500 million available credit would allow it to make a handful of such purchases with ease, giving it more bang for its buck. In fact, earlier this year, that's exactly what it said it was going to do when Smith & Wesson said it would create three new divisions for outdoor products as part of a broad restructuring.
Now it did purchase UST right after getting its new credit facility, and its investor presentation earlier this year also suggested plugging holes in its firearms portfolio, such as in shotguns (where it has a negligible presence), meaning a firearms manufacturer acquisition is still possible. But I think you will find Smith & Wesson continuing to build out the accessories and sporting goods side first to further align itself with its corporate transformation goal.