American Outdoor Brands is now Smith & Wesson Brands (NASDAQ:SWBI) after the company officially changed its name and ticker symbol on June 1. The gunmaker is preparing the spin off of its outdoor gear and accessories business later this year.

It's only been three and a half years since the company hung up on its storied history and buried the Smith & Wesson name under the generic branding, but it's clear the decision was misguided as the proposed synergies never materialized.

Now as the company is poised to split in two again, investors need to ask themselves whether they want to invest in Smith & Wesson, the new American Outdoor Brands, or both.

Man with laser-sighted pistol and flashlight

Image source: Smith & Wesson Brands.

The case for the outdoors business

The case for American Outdoor Brands was always the opportunity to tap into the large and growing rugged outdoor recreation market. Estimated to be worth as much as $35 billion, the new gear and accessories company is forecast to generate between $25 million and $30 million in earnings before interest, taxes, depreciation, amortization, and stock-based compensation (EBITDAS) on between $200 million and $210 million in annual revenue.

With a portfolio of respected brands, including Crimson Trace, Tipton, Schrade, and more, management sees the new American Outdoor Brands as a high-growth business that can capitalize on mergers & acquisitions to expand and build on organic growth.

It can also do so without the baggage and volatility the firearms business brings. Sales and earnings would be smoother and not subject to the fits and starts associated with guns, or the persistent attacks on the business.

The case against betting on gear and accessories

The problem with this bet is those were the same arguments made in favor of Smith & Wesson changing its name and focus to American Outdoor Brands. The promised growth has not really materialized as promised and it didn't help balance the firearms-related volatility, which because it represented such a large portion of the sales, still made performance irregular.

Yet it does work better as a separate company. Much as Vista Outdoor (NYSE:VSTO) sold off its Savage Arms business to concentrate on the outdoors and shooting sports accessories markets, a stand-alone American Outdoor Brands gives a more focused investment in the market.

The company, though, will be just a small player in a big market; that $210 million in annual revenue management forecasts is a drop in the bucket. While it has a number of brands that are tops in their field, it may be difficult for American Outdoor to be anything other than a small niche player.

The case for a firearms pure play

Smith & Wesson Brands is one of the biggest gunmakers in the industry, constantly battling rival Sturm, Ruger (NYSE:RGR) for the top spot.

Few firearms manufacturers have as long of a legacy as Smith & Wesson does, having been founded in 1852 and owning a space in the lore as rich as those carried by Colt, Remington, and Winchester.

Yet a company can't rest on its laurels, and Smith & Wesson has proved adept at innovating to keep it at the forefront of the industry. New product introductions remain the driving force behind sales growth and last quarter represented 37% of total firearms revenue as its new concealed carry M&P-branded polymer pistol helped push shipments higher.

Chart of adjusted NICS background checks

Data source: National Shooting Sports Foundation. Chart by author.

Sales are surging this year due to a confluence of events that will likely make 2020 a record-breaking year. There is, of course, the coronavirus pandemic that caused people to purchase their first firearm for protection, and more recently the violent protests that have broken out across the country are pushing people to purchase a gun to protect their families and property. Against all this is the backdrop of a presidential election in November.

Adjusted criminal background checks of potential gun buyers are running 53% higher than last year.

The case against a guns-only business

As noted above, fear-based buying comes in waves, and though it brings boom times for extended periods, sales can dry up too.

After the run-up in sales in 2016, the industry went through three consecutive years of decline. While that might have been the longest drought experienced, as previous downturns last for maybe 12 months to 18 months, it shows how an investor needs a truly long-term outlook when betting on a firearms pure play.

After such a surge in gun buying as is being experienced this year, Smith & Wesson could very well see another prolonged slump depending on various economic and political outcomes.

The verdict

While the recent history of Smith & Wesson and the firearms industry has been one of extremes, the long-term trend has been one of growth. Gun ownership is part of America's DNA and has been part of what separates us from the rest of the world. Smith & Wesson Brands should continue to grow for years to come, albeit with some ups and downs along the way.

The same can't necessarily be said of the American Outdoor Brands spinoff. The company will be one of many competitors, most much larger, and the gear and accessories maker hasn't shown yet it can effectively make a mark in the space.

A small bet may be worthwhile to play on the chance the spinoff finds its groove, but I find the gunslinger's stock a better investment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.