Smith & Wesson Brands (SWBI 1.66%) recently posted another period of record results, doubling sales for the third consecutive quarter. But the firearms maker is now going to begin lapping those outstanding gains.
That's going to make it difficult to maintain such a torrid rate of growth, and some analysts fear the iconic gun stock has peaked and earnings will soon give way. Because Smith & Wesson will look like it's underachieving compared to the year before, the market may punish its shares.
It's true that companies in this situation often see their stock price fall before their earnings do. But here are four reasons why that doesn't apply here, and why Smith & Wesson can overcome this glaring problem.
Image source: Getty Images.
These are not normal times
Beyond a pandemic that provided an undergirding of fear, there was widespread looting and rioting last year at the same time that there were calls to defund the police or otherwise cut their budgets. People believed they needed to take their personal safety and the protection of their families and properties into their own hands.
Raw data from the FBI -- as adjusted by the National Shooting Sports Foundation (NSSF) to account for things like background checks on existing concealed carry weapon permit holders -- found there were over 21 million checks performed through the National Instant Criminal Background Check System last year. That was 60% more than in 2019 and 34% more than the previous record of 15.7 million checks set in 2016.
And it's not stopping. Over the first two months of 2021, adjusted background checks are running 39% higher than in 2020, meaning this year is shaping up for another record-setting performance.
Data source: National Shooting Sports Foundation. Chart by author.
More first-time gun buyers than ever before
While there's a certain conceit that it's the same people stockpiling more and more guns that's driving sales, the reality is quite different. The NSSF estimates that in 2020, over 8.4 million people purchased a gun for the first time, accounting for 40% of all the purchases made last year.
Moreover, the diversity of gun buyers was unprecedented too, with women accounting for 40% of all purchases last year, while African Americans bought 58% more guns to protect themselves in 2020 than they did in 2019.
This surge in gun purchases brought more new people into the shooting sports than ever before who will likely provide continuing upward pressure on gun sales, ammunition, and accessories.
Case in point: American Outdoor Brands, which spun off from Smith & Wesson last year, reported sales up 60% over its first two fiscal quarters; Vista Outdoor reported a 41% increase in ammo sales last quarter; and Olin said its Winchester ammunition segment had record quarterly earnings.
New gun laws still not assured
Of course, the results of last year's elections also helped motivate many people to buy firearms, and the momentum driving background checks and gun sales higher today is being partially driven by a new administration and Congress that are seemingly more agreeable to passing stricter gun laws.
Yet narrow majorities in the House of Representatives and a split Senate will make it much more difficult to get new legislation approved. While it seems possible some new laws will make it onto the books, it also seems likely that the most restrictive laws gun control activists want will have a harder time getting through. But the debate surrounding those measures will also create awareness and help drive firearms sales higher.
Cheap valuation
Even though Smith & Wesson is going through unprecedented times with sales, its stock remains significantly discounted. Shares trade at less than 8 times next year's earnings estimates while going for a bargain-basement 3 times free cash flow.
Wall Street expects Smith & Wesson to expand earnings at an annual average 15% rate for the next five years, providing a solid foundation for its business. And the gunmaker was confident enough in its finances to begin paying a modest dividend last year that currently yields 1.1%.
Overcoming adversity
There's no doubt the firearms industry is flexing its muscles after enduring a four-year slump, but the factors that woke the beast from its slumber have not evaporated and the industry looks as healthy as ever.
There may well come a time when Smith & Wesson Brands has hit its peak, but it doesn't appear we're anywhere near the top yet, and it looks like it is a value stock with significant growth opportunities for some time to come.
