The market reacted with shock and surprise to Smith & Wesson Brands' (SWBI 1.82%) big quarterly earnings beat, sending the gunmaker's stock soaring 17% on the news, but it was easy to see what was coming had you been paying attention.
The massive growth in firearms sales both last year and today should have been the first indication Smith & Wesson was going to shoot out the lights, and there's a good chance this trend is on target for further growth.
Image source: Getty Images.
Need for personal protection driving gun sales
Smith & Wesson reported fiscal fourth quarter sales surged 67% from the year ago period, hitting around $323 million. It helped boost full year sales to over $1 billion for the first time ever, more than double what the gunsmith recorded last year as its growth far outstripped that of the industry.
Even though it was the first quarter in the past four where revenue didn't double, firearms sales remain white hot. The number of FBI criminal background checks on potential gun buyers conducted through the law enforcement agency's National Instant Criminal Background Check System jumped 40% last year to 39.7 million. So far this year they're running 25% above that rate.
Even when the National Shooting Sports Foundation adjusts the FBI's raw data to account for duplicate background checks, such as those performed on existing concealed carry permit holders to ensure they're still eligible, there were over 21 million investigations conducted into gun buyers, and its up about 5% year over year this year.
While background checks don't translate in gun sales on a one-to-one basis since someone might buy more than one firearm or not buy any at all, it's a good indication of consumer demand and the pace of growth has been a breathless one.
Data source: National Shooting Sports Foundation. Chart by author.
In more recent years, fear of restrictive gun control legislation has spurred firearms sales, but last year it was more the desire for personal safety that led to some 8 million individuals buying a gun for the first time ever.
Riots, unrest, and calls for defunding the police had more than a few people realizing they may need a firearm if they wished to protect themselves, their families, and their property.
The election of Joe Biden as president, who ran a campaign promising to enact stricter gun laws, has likely caused gun owners and enthusiasts to purchase guns now in case they were no longer able to later on. They likely dodged a bullet, though, when Biden's executive actions of firearms issued in the first days of his administration, were rather mild procedural issues than any serious attempt to restrict sales.
It might explain why background check growth has ebbed. The NSSF reports May checks were down 22% from April and 17% from a year ago. Even though Democrats hold both houses of Congress and the White House, additional action on major gun control legislation may be delayed.
A growth stock in the discount bin
Despite the spike in Smith & Wesson's stock price, it still trades at a discount. Its shares still go for 0 times next year's estimates and 15 times trailing earnings, meaning with analysts forecasting long-term earnings growth of 15%, it trades even to its expected growth rate.
However, Smith & Wesson also goes for just four times the free cash flow it produces, which is a bargain basement rate, although the gunmaker rarely trades at much of a premium to it.
The iconic firearms company was also able to expand gross margins by 129 basis points to 45.1% from 32.2% a year ago, even though expenses jumped, including for wages. Its profit profile also allowed it to already raise its new dividend by 60% to $0.08 per share.
As a pure-play gun stock now following its spinoff of American Outdoor Brands last year, Smith & Wesson Brands looks like a surefire winner still.
