Tic-tac-toe, investors want to know. After blowing away earnings estimates in each of the past two quarters, can arms maker Smith & Wesson (NASDAQ:SWHC) make it three in a row? Management's shooting for a second-quarter 2008 earnings release Thursday afternoon.

What analysts say:

  • Buy, sell, or waffle? Of the seven analysts who have a grip on S&W, six give it a buy, and one says to hold.
  • Revenues. On average, they're looking for sales to rise 40% to $71 million, helped by the firm's January acquisition of Thompson/Center Arms.
  • Earnings. But profits are predicted to flatline at $0.07 per share.

What management says:
This is going to sound obvious, but Thursday's news could surprise us. In a "preliminary" earnings release back in October, management advised that "strong" sales growth led it to expect $69 million to $71 million in sales, and $0.05 to $0.07 per share in profits thereon. Anybody else notice that Wall Street didn't seem to hear the first part of those ranges? (I'm guessing they'll be mighty upset if S&W has to remind them come Thursday.)

What management does:
If past is prelude, though, we shouldn't have to worry about that. Gross and operating margins have been rising steadily at S&W. The only hitch to this growth story is that net margins have slipped as the costs of buying Thompson/Center Arms come home to roost. S&W took on more than $100 million in debt to finance the purchase, and while the Federal Reserve may be cutting interest rates elsewhere, interest payments are on the rise at S&W.

Regardless, S&W still earns a better operating margin than publicly traded rival Sturm, Ruger (NYSE:RGR), and it does nearly as well as privately held Remington Arms. Less comparable high-tech weapons firms, such as TASER (NASDAQ:TASR), Metal Storm (NASDAQ:MTSX), and Ionatron (NASDAQ:IOTN), have margins that differ widely from the two publicly traded "legacy" firearms makers. TASER gets much better margins, while Metal Storm and Ionatron are losing money.

Margins

4/06

7/06

10/06

1/07

4/07

7/07

Gross

31.0%

32.3%

32.6%

33.5%

33.4%

34.0%

Operating

9.1%

8.9%

10.3%

11.0%

11.5%

11.8%

Net

5.4%

5.3%

6.1%

5.8%

5.5%

5.4%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Getting back to the future (Thursday, to be precise) -- what might cause S&W to miss analysts' lofty expectations for the second quarter? In the preliminary release, CEO Michael Golden mentioned a certain "softness in the market for hunting rifles and shotguns, driven by lower-than-expected consumer demand, a buildup of preseason retail inventories, and unseasonably warm autumn weather." He advised that Thompson/Center Arms hunting rifles sales have held up reasonably well. However, Smith & Wesson-brand rifles and shotguns are pretty new to the hunting market, and sales appear to be suffering from the lack of name recognition.

Looking farther out still, S&W walked back its revenue guidance for the year to "approximately $325 million in fiscal 2008," and cautioned that increased spending on "promotional programs" could slice one to two percentage points from previously expected gross margins. (If the damage will be inflicted to gross, rather than operating, margins, I'm guessing Golden is talking about discounting prices on his long guns, as opposed to higher spending on marketing.) Put it all together, and this year's profits could be as little as $0.53 per share -- 16% less than previously planned.

What did we expect out of S&W last quarter, and what did we find in the chamber? Read about it in:

Fool contributor Rich Smith does not own shares of any company named above. TASER is a Motley Fool Rule Breakers pick. The Motley Fool has a disclosure policy.