Smith & Wesson Holding Corp. Earnings: Can the Stock Keep Soaring?

On Tuesday, Smith & Wesson Holding (SWBI -1.02%) will release its quarterly report, and shareholders have been pleased to see continued share-price gains from the gunmaker. Yet along with rival Sturm, Ruger (RGR -0.41%), Smith & Wesson is in danger of seeing earnings top out, and many investors wonder whether the good times for the gun industry will last or whether the recent move from Alliant Techsystems (NYSE: ATK) to spin off its firearms and sporting segment marks a high-water mark for Smith & Wesson and other gun manufacturers.

Smith & Wesson has been the ultimate contrarian investing play, as many people expected that tougher gun regulation would hurt sales and bring Smith & Wesson, Sturm, Ruger, and other gunmakers to their knees. Yet in many ways, the opposite has been true, as the threat of tighter gun regulation has led to higher short-term sales. Still, even the gun companies themselves have warned that short-term effects could eventually give way to slower growth, and the question is whether that time has come or whether further growth opportunities still exist. 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.

Source: Smith & Wesson.

Stats on Smith & Wesson

Source: Yahoo! Finance.

Will Smith & Wesson earnings start shrinking?
In recent months, analysts have boosted their views on Smith & Wesson earnings, raising April-quarter estimates by $0.02 per share and increasing their fiscal 2015 projections by about 4%. The stock has kept soaring, with gains of 37% since late February.

Most of Smith & Wesson's gains came early in the quarter, when the gunmaker announced its earnings for the January quarter. Sales jumped more than 7% from the year-ago quarter despite the loss of revenue from Smith & Wesson's arrangement with Walther Arms, and net income from continuing operations rose nearly 35% on a roughly 30% rise in handgun sales. Moreover, Smith & Wesson gave positive guidance for the April quarter, boosting estimates for the full fiscal year as well.

Source: Smith & Wesson.

What was particularly impressive about Smith & Wesson's results is that investors were so much more pleased with them than they were with what rival Sturm, Ruger posted. For its part, Sturm Ruger saw a 33% jump in earnings per share, but shareholders weren't satisfied with that performance and sold off the shares accordingly. Investors have clearly gotten spoiled from such high demand last year that Sturm Ruger wasn't able to keep up, but they nevertheless appear to be concerned about what might be the looming end of the current strength in gun sales, as background-check volume has plunged in recent quarters and sporting-goods retailers have seen weaker sales as well. That might also be part of the justification for Alliant Techsystems choosing to spin off its Savage Arms and other sporting-goods brands into a separate entity.

Still, Smith & Wesson appears to be holding up well. Earlier this month, one analyst firm upgraded the company's stock, arguing that Smith & Wesson's new handgun launches are faring well, especially in jurisdictions that allow concealed handguns. If Smith & Wesson can demonstrate its superiority over Sturm Ruger in the eyes of consumers, then it might be a long-term winner even if gun demand returns to more normal levels.

In the Smith & Wesson earnings report, watch to see what comments the company's management has about the future trends in gun sales. Given how long skeptics have been calling for weaker sales, it wouldn't be surprising if Smith & Wesson could forestall the long-awaited setback for at least one more quarter.

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