For the year, Smith & Wesson saw sales leap nearly 21% over fiscal 2009, and perhaps more impressively, they reported their backlog of orders had grown 23% to $143.1 million over the total backlog just a quarter ago. Strong demand for their products also allowed management to guide for fiscal 2011 sales of $430 million to $445 million. Clearly, the company was pleased to see the US Supreme Court’s decision that the Chicago-area ban on handguns as unconstitutional, which can only be considered a positive for the industry and SWHC’s prospects going forward.
Not surprisingly, two notable Wall Street analysts are looking more favorably on the company as sales trends look to continue recent strong momentum. As Merriman Curhan Ford analyst Eric Wold said in his not upgrading SWHC from neutral to buy this morning, “With the improved backlog outlook and visibility it brings, we are now comfortable once again moving off the sidelines and recommending purchase of the shares at current levels.” We tend to agree with Wold, but we are content to leave our rating unchanged at Undervalued. The stock trades near the low end of both its historical price-to-cash earnings and price-to-sales ranges. But even more impressive to us is the revenue growth that SWHC has produced in the last few years. On average for the last four years, they have seen sales grow at an annual rate of 26% and such strong growth is always looked upon favorably in our analysis.
Management is doing a good job of driving growth forward with new guns consumers are eager to buy, and they are looking to grow their defense contracting business. At the current price level, we believe the potential reward outweighs the risks over the long term, and value investors should keep an eye on SWHC. We would not consider the 2007 highs of $20-plus per share to be a realistic target, but we do think that this stock could trade in the high single digits as it continues to grow sales and earnings.
Ockham Research Staff