Smith & Wesson Holding (NASDAQ:SWHC) reports Q1 2007 earnings results tomorrow afternoon. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Five analysts follow the stock; all five rate it a buy.
  • Revenues. On average, they expect sales to surge 30% in tomorrow's news.
  • Earnings. They also expect reported profits to more than double to $0.07 per share.

What management says:
Smith & Wesson (S&W) capped a fine fiscal 2006 -- in which sales rose 27% and profits per diluted share soared 175%, even after expensing stock options -- with a move of the stock from the American Stock Exchange to the Nasdaq. A whole slew of initiatives have supported the company's revival, including a focus on sales to the U.S. government to help arm federal law enforcement and the Afghanistan National Police, and the introduction of new lines of "military & Police" firearms targeted (sorry, bad pun) at penetrating (ditto) domestic and federal law enforcement markets. The company has also switched from an independent sales force, in which salesmen sold both S&W products and those of other manufacturers, to one directly employed by the company and focused on selling only S&W products. Finally, Smith & Wesson is leveraging its strong name recognition and high-quality reputation through licensing deals (just take a look at the price list), and manufacturing firearms that one wouldn't ordinarily associate with the famed handgun maker, including tactical rifles, hunting rifles, and shotguns.

Put it all together, and management now projects that fiscal 2007 will see 14% to 18% sales growth and roughly a 50% increase in profits per diluted share, to about $0.31 per share.

What management does:
S&W's margin trends have been a mixed bag over the last 18 months. But last quarter's surge in gross margins brought the rolling gross tally to its highest level in a year. Combined with operational improvements, this started pushing operating and net profits up, too.

Margins %

1/05

4/05

7/05

10/05

1/06

4/06

Gross

34.4

30.2

29.3

29.6

26.1

31.0

Op.

8.8

7.5

7.9

7.8

3.9

12.0

Net

3.8

4.2

5.0

3.7

4.4

5.4

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
On a firmwide level, S&W predicts about $14 million in operating cash flow this year, and $8 million in capital expenditures -- yielding about $6 million in free cash flow. However, note management's clarification that the capex figure is for maintenance capex only. If the firm decides to fund any expansion outside of its core business, free cash flow will be lower.

So as good as the GAAP numbers looked last year, and as good as they appear this year, there's a significant difference building between those accounting profits (projected at $13 million this year) and S&W's actual cash profits. That has me feeling a bit leery of the attractive GAAP numbers. From a cash-profits basis, the firm isn't looking as profitable as its accounting profits suggest.

Competitors:

  • Law Enforcement Associates (AMEX:AID)
  • Mace Security (NASDAQ:MACE)
  • Sturm, Ruger (NYSE:RGR)
  • TASER International (NASDAQ:TASR)

Suppliers:

  • Carpenter Technology (NYSE:CRS)

Smith & Wesson made plenty of cash over the last six months, so I'd actually be less worried about the projections for 2007 -- if this issue didn't keep popping up. Read more about it in:

Fool contributor Rich Smith does not own shares of any company named above. TASER is a Motley Fool Rule Breakers pick. The Fool has a disclosure policy.