Have Smith & Wesson Earnings Hit Their Peak?

Smith & Wesson (SWBI 1.66%) will release its quarterly report on Thursday, and after a nice run for the stock, investors look like they're starting to rein in their expectations for the future. Although Smith & Wesson earnings have been strong lately, the ability for the business to sustain its huge growth rate into the future looks more uncertain than ever.

Smith & Wesson has benefited from nervousness about whether gun control laws will get stronger, with many gun buyers trying to make purchases now rather than waiting and potentially having to deal with tougher regulations in the future. But after the flood of orders that the industry has seen in recent years, some analysts believe that the best times for gunmakers are already behind them. 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 report.

Stats on Smith & Wesson

Source: Yahoo! Finance.

How much further can Smith & Wesson earnings grow?
Analysts have continued to get more excited in recent months about Smith & Wesson earnings, raising their July quarter estimates by a nickel per share and their full-year fiscal 2014 projections by more than four times that amount. The stock has done quite well as well, climbing nearly 20% since late May, but having dropped from even bigger gains last month.

Smith & Wesson got off to a great start to the quarter, with its April-quarter report stoking new enthusiasm about the company's prospects. The company lived up to its preliminary results when it made its full earnings announcement in late June, more than tripling its net income for the full fiscal year on a 43% jump in sales.

The concern for investors, though, is that industry insiders increasingly expect the rampant activity in gun and ammunition sales to slow down at some point. Olin (OLN 1.25%) CEO Joseph Rupp, which makes Winchester ammunition, argues that both it and industry peers Smith & Wesson and Sturm, Ruger (RGR 0.52%) expect a decline similar to what happened the last time demand was this strong. Sturm, Ruger actually bought a third manufacturing plant in July to increase its production capacity. Still, even though Smith & Wesson is looking to expand its capacity, it's taking more cautious steps to be smart about its expansion plans, giving it the ability to weather a possible future slowdown.

The most recent drop in Smith & Wesson stock reflected those concerns. An analyst in mid-August said that he expects slower sales during the next six months, cutting his rating on Smith & Wesson and arguing that the failure of Congress to enact tighter gun laws has taken some of the urgency away from potential gun buyers.

In the Smith & Wesson earnings report, watch to see whether the company comments on Sturm, Ruger's new plant. If the company thinks that demand might slow in the immediate future, then it could conclude that its own course is a lot more prudent than the more aggressive expansion that its main rival is doing.

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