Smith & Wesson (SWHC, Financial) did not rally as hard as the broader Standard & Poor 500 Index did post-election. The $1.37 billion firearms maker fell -15.2% on Nov. 9, while the index gained 1.1%. Business Insider suggested that there may be less panic about tougher gun laws, therefore leading to less demand in Smith & Wesson’s products, resulting in a sell-off.
Earnings performance
On Sept. 1, Smith & Wesson delivered its fiscal first-quarter 2017 earnings results. In comparison to the second quarter of fiscal 2016, the gun maker delivered 40% sales growth to $206.95 million and 126.3% profit growth to $14.4 million.
"We are very pleased with our first quarter results, which exceeded our financial guidance. We believe that higher revenue was driven by strong consumer demand as reflected in adjusted background checks from the National Instant Criminal Background Check System (NICS) as well as our own market share gains.
During the quarter, we announced the acquisition of Taylor Brands and Crimson Trace, two accretive acquisitions, making strong in-roads on our strategy to become a leader in the market for shooting, hunting, and rugged outdoor enthusiasts. These acquisitions, which further expand our presence in the markets for outdoor products and accessories, were completed early in the second quarter. Based upon that timing, as well as our performance for the first quarter and our revised outlook for the remainder of fiscal 2017, we are raising our full year revenue and net income guidance."
James Debney, Smith & Wesson Holding Corp. president and chief executive officer
Fiscal year 2017 outlook
After finishing its first quarter operations, the gun maker provided a forecast that it would gain sales between $900 to $920 million for its fiscal 2017 operations, compared to $723 million in 2016. The company also gave an earnings per share (EPS) outlook between $2.09 to $2.19, compared to $1.68 in 2016.
While the broader index gained 0.42%,Ă‚ Smith & Wesson shares closed -6.39% post-earnings announcement despite the outstanding growth figures the company provided in its first quarter figures.
Market performance
Smith & Wesson had an outstanding five-year total return of 51.97%, while the broader index had 14.9%. Year-to-date, the company delivered a 11% return, while the latter provided 9.11% (2).
Valuations
Smith & Wesson had a trailing 12-month price-earnings (P/E) of 12.3 times (industry median: 19.8), price-book (P/B) of 4 (industry median: 2) and price-sales (P/S) ratio of 1.7 times (industry median: 1.2) (1). The company has not provided any dividends in the past decade and $172 in total share buybacks in the same period (2).
Smith & Wesson Holdings
Smith & Wesson was founded in 1852 by Horace Smith and Daniel B. Wesson. Smith & Wesson is one of the world’s leading manufacturers of firearms and a provider of quality accessory products for the shooting, hunting and rugged outdoor enthusiast (3).
The company manufactures a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt-action rifles and single shot rifles), handcuffs and firearm-related products and accessories.
Smith & Wesson had a 19% market share in the domestic non-military firearm market for handguns and 5% for long guns, excluding shotguns, in calendar year 2015.
Smith & Wesson has two reportable segments: firearm and accessories divisions. The company also derives most of its sales in North America, 97% in fiscal 2016.
(Annual filing)
Firearm division
Smith & Wesson’s firearm division can further be divided into: handguns, long guns, Walther and other products. Handguns contributed 74%, or $485.4 million, of firearm division sales in fiscal 2016 and 67% to total Smith & Wesson 2016 sales.
In 2016, the firearm division delivered a 24% growth to $657.6 million year over year with a 23.5% operating margin.
Accessories division
Smith & Wesson’s accessories division is a leading provider of shooting, hunting, reloading, gunsmithing and gun cleaning supplies. Since 2011, the company has introduced over 300 variations of accessories products in addtion to holding over 40 patents currently.
In 2016, accessories contributed 9%, or $65.3 million, in total sales, while growing an outstanding 216% for the period, which was brought in by acquisitions. The division also delivered an operating margin of 3.1%.
Overall, the firearms manufacturer had a five-year sales growth average of 13% and four-year profit growth average of 113%.
Cash, debt and book value
Unaudited financials indicate Smith & Wesson had $215 million in cash as of July 31 and $171.5 million in debt with a 0.50 debt-equity ratio.
Smith & Wesson also had 20.88% of its $654.7 million assets in goodwill and intangibles and had a book value of $340.36 million, compared to $307.8 million three months earlier.
Cash flow
(Cash flow, Press Release)
In the first quarter of 2017, Smith & Wesson enhanced its cash from operations by 129% to $38 million, mostly because of its outstanding profit growth. Capital expenditures were $15.8 million for the period, leaving the company with $22.3 million in free cash flow. Smith & Wesson also reduced its debt by $1.7 million, including payments related to capital lease.
(Cash flow, Annual filing)
In review, Smith & Wesson grew its cash from operations mostly through profit growth, depreciation and amortization, accrued payables, profit sharing and payroll and incentives in fiscal 2016.
In fiscal 2015, on the other hand, Smith & Wesson allocated a combined $159.2 million in acquisitions of both Tri-Town Precision Plastics and Battenfeld Technologies Inc. Tri-Town Precision Plastics is a provider of custom injection molding services, rapid prototyping and tooling. Battenfeld Technologies is a leading provider of hunting and shooting accessories.
(Free cash flow, annual filing)
As observed, the firearms manufacturer was also able to demonstrate steady free cash flow growth in recent years.
Conclusion
Smith & Wesson delivered strong results due to increased demand in both handguns and long guns, accompanied by acquisitions, in 2016. Forecasting whether or not guns will still be in high demand during the Trump administration would be especially difficult and therefore, overall business growth could be assumed cyclical in nature.
(Google Finance)
Despite its already great returns to date, traditional earnings multiples revealed that Smith & Wesson is still undervalued compared to its peers. With a positive outlook for this fiscal year, Smith & Wesson may deliver and reward its shareholders during the period.
On Oct. 6, Wunderlich and Craig Hallum downgraded Smith & Wesson shares to hold from buy with a price target of $29 and $35 a share, respectively. Using a four-year historical multiple, its fiscal 2017 EPS outlook and a 20% margin indicate a $21 a share value.
In summary, Smith & Wesson is a hold with a target price of $23 a share.
Notes
(1) Gurufocus data.
(2) Morningstar data.
(3) Annual filing.
Disclosure: I do not have shares in any of the companies mentioned.
Start a free 7-day trial of Premium Membership to GuruFocus.
