Smith & Wesson Holding Corp. (SWHC, Financial), for which the shareholders have recently approved the name change to American Outdoor Brands Corp., is a good stock to consider for the medium to long term.
Before talking about bullish factors, I want to discuss the reasons why the stock has declined by 30% recently. With Donald Trump being president-elect, there is speculation that sales of firearms will decline during his term. This is the first factor for the stock to witness some bearish momentum.
Further, when Smith & Wesson reported second-quarter 2017 results, the company comfortably beat guidance, but the revenue and EPS guidance for the coming quarter disappointed the markets. Smith & Wesson expects coming quarter EPS to be in the range of 52 cents to 57 cents as compared to consensus estimates of 59 cents.
These two factors have contributed to a 30% decline in the stock. I will now focus on the reasons why the correction is overdone.
The first point is the reason for Smith & Wesson to change its name to American Outdoor Brands Corporation. In the coming years, Smith & Wesson will focus not just on firearms but on diversification.
According to James Debney, president and CEO of Smith & Wesson:
"We believe that American Outdoor Brands Corp. is a name that truly represents our broad and growing array of brands and businesses in the shooting, hunting and rugged outdoor enthusiast markets."
Therefore, even if it’s assumed that firearms sales decline gradually, Smith & Wesson is likely to offset that decline through focus on a broad range of businesses. Just to put things into perspective from a progress point of view, Smith & Wesson recently acquired the net assets of Ultimate Survival Technologies for a consideration of $32 million. Ultimate Survival Technologies is a provider of high-quality survival and camping products, and the company has witnessed revenue CAGR of 49% for the period of 2012 to 2015.
In the coming quarters, I expect Smith & Wesson to pursue inorganic growth strategy to accelerate revenue growth and minimize (if any) the impact of lower firearms sales. I must mention here that during the second quarter of 2017, Smith & Wesson successfully increased its revolving credit facility from $225 million to $500 million. The objective of this increase is to invest in future growth (organic and inorganic). I don’t see any concerns from a financial flexibility perspective.
Besides the developments on the business front, Smith & Wesson is trading at attractive valuations. For the year ending April 30, 2017, Smith & Wesson expects EPS to be in the range of $2.42 to $2.47. Even at the lower end of the guidance, the stock is trading at just 8.8 times fiscal 2017 earnings and this is indeed inviting considering broad market valuations and also considering the point that Smith & Wesson will seek new growth avenues in the coming years.
From a business diversification perspective, it is important to mention here that the business shift is not entirely into something drastically different. Just as an example, focus shifting from firearms to recreational shooting and outdoor goods seems like a logical extension or diversification. Therefore, organic investments are unlikely to be significant and inorganic growth will immediately impact the top line and bottom line.
Considering the factors discussed and the sharp correction recently, Smith & Wesson is worth buying for the medium to long term. While diversification will provide future growth visibility, fiscal 2017 valuations are attractive for investors looking to make quick gains in the markets.
Disclosure: No positions in the stock.
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