Please ensure Javascript is enabled for purposes of website accessibility

Foolish Forecast: Smith & Wesson Loads

By Rich Smith – Updated Nov 15, 2016 at 4:08PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Views you can use to get clues on tomorrow's news.

Tic-tac-toe, investors want to know: After putting together back-to-back quarters in which it "beat" consensus estimates for its earnings, can Smith & Wesson Holding (NASDAQ:SWHC) make it three-in-a-row when it reports its fiscal second-quarter 2007 earnings tomorrow afternoon?

What analysts say:

  • Buy, sell, or waffle? All four analysts who follow the stock rate it a buy.
  • Revenues. On average, they expect sales to surge 37% in tomorrow's news, to $48.6 million ...
  • Earnings. . and for reported profits to more than quadruple to $0.09 per share.

What management says:
In September, just days after reporting fiscal Q1 results that exceeded expectations, Smith & Wesson filed an investor presentation with the SEC. Here's what management has to say for itself: It has the largest U.S. market share (45%) in revolvers, and the third-largest (11%) for non-revolver pistols. And the future looks even brighter. In a survey the company commissioned, asking prospective firearms purchasers what brand of weapon was most likely to be their next purchase, S&W was named the top choice not only in its market-leading revolver business, but also in pistols, and best of all, in the tactical rifle market that it just entered. If you assume the survey was on the up-and-up (remember, S&W paid for this survey), then that bodes very well indeed for it stealing market share from its rivals going forward.

Combine those prospects with what the firm has already accomplished over the last four quarters, in two of which it showed better than 20% sales growth, and two more better than 40%, and things are looking very good indeed.

What management does:
On the margins front, we see the firm beginning to enjoy the benefits of a scalable business, as rolling gross margins grew in each of the last two quarters, rolling operating margins sit comfortably above where they were a year ago, and rolling net margins also seem to be moving upwards (if more bumpily).

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

30.2

29.3

29.6

27.6

31.0

32.4

Op.

7.5

9.1

8.9

6.5

12.0

11.8

Net

4.2

5.0

3.7

4.4

5.4

5.3

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:
As S&W rapidly ramps its production, seeks new contracts, and begins to enter multiple new markets, it's crucial to monitor how well it manages its working capital. Cash flow has historically been a problem, but from the looks of things, it's beginning to work out the kinks. Examining the balance sheet over the last couple of quarters, I see that in comparison to sales growth of 45%, accounts receivable are outpacing that growth only slightly at 50% -- and given that the firm is dealing with a notoriously slow-paying U.S. government on some of its new contracts, I don't think investors need worry about the small discrepancy here.

Meanwhile, inventory trends are simply stellar. Ordinarily, we like to see inventories grow no faster than sales -- but at S&W, they're actually declining -- down 2% on average in comparison with the year-ago period, even as sales shoot through the roof. The company is selling guns as fast as it can build them.

Although free cash flow remains negative over the last 12 months, investments in building capacity to meet the rush of new product demand explains that. Operating cash flow is actually quite strong -- it's just that capital expenditures are eating up all the free cash flow. Over time, we'll want to see that trend reverse, for capex to slow down, while cash generation continues apace. Something to look forward to, tomorrow?

Competitors:

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

Suppliers:

  • Carpenter Technology (NYSE:CRS)

What did we expect to see at Smith & Wesson last quarter, and what did it produce? Find out in:

TASER is a Rule Breakers pick.

Fool contributor Rich Smith does not own shares of any company named above.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
RGR
$51.16 (0.69%) $0.35
Axon Enterprise Stock Quote
Axon Enterprise
AXON
$113.46 (1.35%) $1.51
Carpenter Technology Corporation Stock Quote
Carpenter Technology Corporation
CRS
$33.33 (-4.55%) $-1.59
Mace Security International, Inc. Stock Quote
Mace Security International, Inc.
MACE
$0.15 (0.66%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.