How Smith & Wesson Reenergized Its Rally

Next Tuesday, Smith & Wesson (SWBI 0.47%) will release its latest quarterly results. Despite facing a great deal of controversy following the tragic shootings at Sandy Hook Elementary School, the company hasn't suffered the drop in business demand that some expected to see, and the stock has continued to perform well despite moves from some investors to divest themselves of their holdings.

Indeed, from a fundamental business perspective, Smith & Wesson has experienced substantial growth recently. That's consistent with past customer behavior during times of heightened scrutiny of gun control policy, as buyers accelerate purchases in advance of any feared new restrictions on the industry. Let's take an early look at what's been happening with Smith & Wesson over the past quarter and what we're likely to see in its quarterly report.

Stats on Smith & Wesson

Source: Yahoo! Finance.

How will Smith & Wesson's earnings fare this quarter?
Analysts have gotten increasingly optimistic about Smith & Wesson's earnings prospects in recent months, boosting their April-quarter estimates by $0.03 per share and their full-year fiscal 2014 consensus by $0.04 per share. The stock has continued its recent move higher, rising by about 5% since mid-March.

Investors have already seen preliminary information about Smith & Wesson's quarter. With net sales rising 38% for the quarter on a 63% jump in net income, Smith & Wesson announced an extensive buyback of $100 million in stock. Combined with refinancing outstanding debt to reduce interest costs, the company expects to make a direct tender offer for about 7.5 million shares at $10 per share. The announcements reflect the company's optimism about its ability to weather any future gun control headwinds.

Yet within the firearms industry, the response to the threat of stronger gun control has remained contentious. Some smaller manufacturers of firearms and ammunition have looked at shifting their headquarters out of states like Connecticut that have enacted greater regulations on guns, and states with less restrictive laws have sought to encourage their relocation efforts. The CEO of Sturm, Ruger (RGR) said in April that the company would remain in Connecticut, and it doesn't seem likely that Massachusetts-based Smith & Wesson would make a shift either, but the climate for business activity within the industry reflects the intensity of the debate on gun policy. With congressional action having thus far been limited, most fears have been overstated, at least for now.

At least for now, competition doesn't seem to be weighing against Smith & Wesson. TASER (AXON 0.07%) has seen a ramp-up in growth prospects, but it's drawing at least as much of its business from law enforcement and other government purchases rather than private sales. An interesting competitive threat comes from the potential to use 3-D printers to produce firearms, but with the State Department having clamped down on one such gun maker, such efforts won't be large enough in scale for the foreseeable future.

In Smith & Wesson's quarterly report, watch for further signs of whether changing conditions are likely to hamper profits. Analysts believe that the company's profitability will peak soon, so anything that points to better earnings ahead could send shares for another move up.

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