At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Shoot 'em if you got 'em -- and if you can't get 'em, buy Olin
Ammunition maker Olin Corp (NYSE:OLN) reported blockbuster earnings earlier this week -- not that anyone cared. In Q4, net income rose to $0.43 per share, or nearly twice the $0.23 Olin earned in last year's Q4. Revenues were up a whopping 32%, to $588 million.
Much of these gains can be credited to the company's Winchester-brand ammunition business. As CEO Joseph Rupp explained in the earnings release:
The Winchester business began to experience increased demand around the time of the election and the elevated level of demand continued through the balance of the year. Fourth quarter 2012 commercial volumes increased in excess of 20% compared to the fourth quarter of 2011.
What's more, "commercial volumes in Winchester are expected to remain at elevated levels and as a result, first quarter 2013 earnings are forecast to significantly exceed first quarter 2012 earnings." Indeed, Olin thinks it could earn as much as $0.45 in Q1.
Regardless, investors sold off the stock after earnings, purportedly in response to weak Chlor Alkali sales in the company's chemicals business. But one analyst thinks that's a mistake: Wells Fargo.
This morning, Wells Fargo announced a sharp turn against the direction the herd is taking, and said it is upgrading Olin shares to "outperform." Is it right to do so?
Gunmakers -- holstered!
You've probably heard by now about the troubles weapons makers are experiencing. With a recent spate of gun violence having sparked calls for tightened regulation on gun sales in Congress, shares of Smith & Wesson (NASDAQ:AOBC) and Sturm, Ruger (NYSE:RGR) -- the only two publicly-traded gunsmiths in the U.S. -- are on the ropes.
Trading today for valuations of just 10.4 and 16.4 times earnings, respectively, both stocks look like incredible bargains if they can grow earnings at anywhere near the 30% annual, compounded rate analysts are projecting (for S&W, at least). Ruger estimates are hard to come by, but the company has already posted 75% annualized profits gains across the last five years, according to Yahoo! Finance).
But could Olin stock offer an even more compelling value?
All's Wells with Olin
Just this morning, news began leaking out about a less-than-widely publicized move that Walmart (NYSE:WMT) is making -- a mandate that customers at its stores will be allowed to purchase no more than three boxes of ammunition per customer, per day. That will cut into company revenues, no doubt -- but it can't be helped. According to a company spokeswoman, ammo is in exceedingly short supply right now. Visit any local sporting goods store today, and you're likely to find the shelves bone dry of dry powder. Search the Internet, and pretty much any discount ammunition supplier you can name is fresh out ... of everything.
That sounds like it bodes pretty well for Olin's CEO's promise of "significantly" improved Q1 earnings. It suggests that the analysts' consensus projection of only 7% next-five-years profits growth at the company -- less than half what's expected for its peers -- could be wildly short of the mark. But even if that number's right, it's hard to call Olin, which sells for less than 13 times earnings itself, and pays a 3.3% dividend yield, "expensive."
And not just Olin
A second ammunition stock worth looking at -- if you buy the Walmart's pain is ammo-makers' gain thesis -- is Alliant Techsystems (UNKNOWN:ATK.DL). Probably best known for its rocket engines business, Alliant actually gets about 22% of its annual revenues from selling ammunition to sporting enthusiasts, and a further 37% selling ammo to the military.
Priced at just 8.6 times earnings today (and paying a 1.6% divvy), the stock's being heavily discounted on fears of reduced government spending on its aerospace and military supplies franchises. But with ammunition sales going through the roof -- and making up close to 60% of its annual revenues -- I can't help but think that analysts, who currently foresee only declining earnings for Alliant over the next five years, may be overly pessimistic about this one, as well.
Personally, I'm still of the opinion that the gunmakers Smith & Wesson and Sturm, Ruger offer two of the biggest discounts to intrinsic value -- and the biggest potential profits -- on the market today. But the ammo makers? Olin and Alliant? If you ask me, those two look pretty cheap, too.