As the gun control debate rages in the U.S., Smith & Wesson Holding Corporation (SWHC, Financial) has surged by 150% in the last year. While the rally has been stellar, there is still juice in the rally and fresh exposure can be considered to the stock at current levels.
President Barack Obama has issued new gun control orders, but strict regulations will not necessarily mean that gun sales will trend lower. According to this article from the New York Times, gun sales increased in New Jersey in 2013 after Gov. Chris Christie proposed measures that included expanding background checks and banning certain rifles. The stock surging by 11% on the day Obama proposed stricter regulations underscores that point.
Coming to company-specific factors that are likely to support the rally, Smith & Wesson announced revised earnings guidance for the third quarter and full year ending April 30. Positive revision to the guidance is the first factor that is likely to keep momentum strong for the stock.
For 3Q16, Smith & Wesson now expects EPS in the range of 39 cents to 41 cents per share. Further, for FY16 (ending April 30), the company expects EPS in the range of $1.36 to $1.41. Considering the midrange of the guidance, Smith & Wesson is currently trading at only 17.0 times FY16 earnings. These are attractive valuations for a stock with strong growth momentum.
Further, analyst estimates point to 10% earnings growth for the year ended April 2017. A likely EPS of $1.52 for FY17 implies forward PE (2017) of 15.3. Therefore, even after 147% upside in the last year, the stock is worth considering. The company has been beating analysts' estimates, and the forward PE can potentially be lower.
Besides the earnings and valuation factor, the company’s acquisition of Battenfeld Technologies in the prior financial year is a long-term growth momentum trigger. With this acquisition, Smith & Wesson was able to expand its accessories business, and Battenfeld Technologies helped the accessories division witness 27% year-on-year growth.
Strong growth momentum in this division is likely to continue in the coming years with Battenfeld Technologies being a leading provider of hunting and shooting accessories in the U.S. One of the big advantages in the accessories division is the high gross profit margin. For the year ended April 2015, the company reported revenue of $20.6 million from a division and gross profit of $6.4 million. As sales from this division increase, the company’s overall EBITDA margin will get a boost.
Further, the company's continued emphasis on product expansion is another growth trigger. Smith & Wesson has been active in the acquisition space in the last few years, and more inorganic growth is likely considering the company’s strong balance sheet profile. As of Oct. 31, 2015, the company had approximately $180 million in notes payable and $54 million in cash and equivalents. With an annualized OCF of $45 million, Smith & Wesson has the flexibility to grow through acquisitions.
The company has already initiated a share repurchase program, and the company will be paying dividends in the foreseeable future. There are multiple avenues of shareholder value creation, and Smith & Wesson is well positioned to deliver strong numbers in the next 12 to 24 months.
Considering the valuation and the growth factor, Smith & Wesson is an attractive stock to consider at current levels even after a massive rally in the last year. The company’s forward valuations are attractive and growth has been beating expectations. I expect stock upside in the near term as well as in the long term.
Disclosure: No positions in the stock.
