Smith & Wesson (NASDAQ:AOBC) blew analyst earnings estimates clean out of the water last week. Fiscal Q1 2014 sales of $171 million were up 26% in comparison with fiscal Q1 2013. Per-share earnings of $0.40 were nearly half again what S&W had earned in the year-ago quarter. Yet no sooner did investors see the results, than they sold off S&W stock by more than 10%.
Here's what gives
In any earnings report, there are any number of ways to interpret the numbers. Over the next 400 words or so, I'll tell you how I think investors looked at Smith & Wesson's results, and why they got spooked. Then I'll tell you how you should look at the numbers -- and why they make this stock look so attractive.
Let's start with last quarter, when Smith & Wesson told investors to expect sales of about $165 million, and earnings of no more than $0.37 in fiscal Q1 2014. In fact, the company delivered $0.40 per share on $171 million in revenues. Thus, S&W beat not only analyst estimates last week -- but its own best guess as well. Kudos.
Problem is, looking farther out, S&W warned that with its distribution agreement with Walther ending, it expected full-year 2014 revenues exceed 2013's by only 4%. Even so, the company said revenues of $610 million looked achievable, and earnings of maybe $1.32.
Management's latest guidance now calls for $615 million in revenues at the midpoint, up $5 million from last quarter's guess. This implies that some -- but not all -- of the Q1's "extra" sales were stolen from Q2. The fact that S&W upped its guidance by less than the $6 million extra revenue booked in Q1 suggests the company doesn't see Q1's robust sales as part of a trend that will run throughout the year.
What's more, S&W left its earnings guidance intact at $1.30 to $1.35 for the year. That means management gave itself no credit whatsoever for the extra $0.03 earned in Q1. It didn't increase guidance at all. Viewed from this perspective, you can see why investors got nervous.
Now look at it the right way
All that being said, I still think investors are wrong to shy away from Smith & Wesson stock. Priced at less than 9 times earnings, and projected to grow earnings at 30% annually over the next five years, the stock looks like a pretty compelling "buy."
Granted, those numbers are probably bunk. Real free cash flow at the company was only $60 million for the past 12 months, barely two-thirds of reported "GAAP" income. And with the threat that Congress will impose significant gun ownership restrictions mostly removed, I don't see as much urgency among firearms aficionados, needing to run out and buy guns these days. The gun industry as a whole is now only expected to grow earnings at about 13% annually over the next half-decade -- there's just no reason to expect S&W to grow twice as fast as Ruger, Glock, Beretta, and the rest.
But even so, paying just 10.2 times free cash flow for Smith & Wesson stock that could grow at 13% is already a pretty good deal. And if I'm wrong about S&W's growth rate -- if it does keep growing faster than its peers -- then that just makes the stock an even better bargain.
Long story short, I think last week's panicked sell-off of Smith & Wesson stock was an overreaction. This stock's cheap enough that you can probably go ahead, pull the trigger, and buy.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.