So let's see here. We've got two and a half wars raging in the Middle East. Another one is brewing down on the Colombia-Venezuela border. Al-Qaeda's resurgent in Pakistan. And the U.S. economy's in shambles. Think now might be a good time to go out and buy yourself a gun -- or at least, stock in a gun maker? Smith & Wesson (NASDAQ:SWHC) reports its Q3 2008 earnings tomorrow afternoon.

What analysts say:

  • Buy, sell, or waffle? Eleven analysts track S&W, giving it four buy ratings, five holds, and two sells.
  • Revenue. On average, they expect a bare 2% rise in sales to $55 million.
  • Earnings. Worse, the analysts predict S&W will lose $0.06 per share.

What management says:
Uh-oh. Remember how, three months ago, I described the series of earnings warnings S&W issued? Remember how $330 million in projected sales became $325 million, which in turn became $300 million? Well, after shooting itself in the foot with its own guidance three times in a row, management finally figured out (in January) that the best thing to do is stop squeezing the trigger. It hereby "does not confirm the guidance [it] gave on December 6, 2007, nor [does S&W] give any guidance at this time... [and] cannot tell you when [it] will again be able to give guidance."

What management does:
But in the absence of management commentary, perhaps you'll want to let the trends in the table below guide your thinking: Gross margins remain strong at S&W, but operating margins have slipped (although they're still superior to Sturm, Ruger's (NYSE:RGR)), and net margins have been tumbling all year long. Little wonder the stock is down 60% over the past year.





























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:
January's investor presentation was curious for two reasons: First, the way the report's generally upbeat tone hit a sour note at the end, when S&W disavowed past guidance. Second, the way it showed many numbers going up -- but sales in particular trending sharply downward.

Culminating years of growth, S&W's fiscal Q4 2007 sales rose 59% year over year. But the end came swiftly. S&W stalled out at 56% in fiscal Q1 2008, then plummeted last quarter to 39%. Now, that's still a fine number, no doubt, but a trend of decreasing sales growth doesn't match up well with a trend of steadily lower profits on those sales.

This is starting to look like a "market saturation" story -- as in, we're reaching the point where almost everyone who wants a gun already has one. If that's the case, I see only two "outs" for S&W. Either it needs to first stem the erosion of its profit margins, and then find a way to get them growing again, or it needs to capitalize more on its brand, and expand its market through licensing deals. The firm's already selling S&W-branded knives through Sears (NASDAQ:SHLD), and shooting-safety equipment at Wal-Mart (NYSE:WMT). Come to think of it, considering how high-margin licensing revenue can be, this may be the one solution that solves both of S&W's problems at once.

What did we expect out of S&W last quarter, and what did we find when we checked the chamber? Read about it in: