Nothing screams American like Smith & Wesson (SWHC, Financial). It is one of the longest-standing brands with over 164 years of history making and selling firearms.
It’s really hard to pick stocks these days; while I have followed Smith & Wesson for awhile, with the new president-elect and Republicans controlling both chambers of Congress, we’ll probably see an about-face on gun controls at the same time placing more guns in the hands of police officers and military personnel. Think what you will about whether this is right or wrong, best policy or not, it’s more likely than not.
Headquartered in Springfield, Massachusetts, Smith & Wesson markets its products as “something for everyone” as the guns are built with precision and unrivaled craftsmanship. I’m not a gun guy, never owned one or even shot a handgun, but I still marvel at the engineering and beauty – at least in pictures. I realize the impact of their use.
The company recently reported strong quarterly results with sales of $234 million, a 63% rise year over year, and improved gross margins of 260 basis points, to 41.8%. It earned 57 cents per share and now has a forward price-earnings (P/E) under 9 and trading just above a 52-week low – all things to look for when investing in stocks.
More importantly, over the last 10 years, Smith & Wesson has grown substantially. A 205% growth in revenue, 938% in net income and 218% on the book value side all point to the strength of American guns.
There’s some risks, sure. Following the election results Smith & Wesson eliminated an army contract of $500 million so the market is definitely anticipating a decline in sales and profits, but that's already priced in at this point.
The long-term risk is demographic shifts away from guns since America is still the largest buyer of them at an individual level.
Typical gun buyers can be roughly separated into hard-core owners who buy and collect as well as sport shooters, basic enthusiasts and self-defense owners. In recent years, new owners with one or two handguns have grown significantly as people become increasingly worried about personal safety due to mass shootings and the perception of higher crime. The truth is that crime is down across the board in the last 10, 20 and 30 years. Gun ownership is up and will continue to rise, and the media provides a source of free advertising.
Smith & Wesson makes for a solid long-term value investment with the company potentially earning $4 to $5 per share in the next five years as it continues to increase earnings, buy back stock and drive book value. If the price multiple expands to the company’s five-year average (12x), the stock could easily be a double.
If you’re looking for an alternative in the industry, Sturm Ruger (RGR, Financial) is Smith & Wesson’s biggest competition and following closely behind it in market capitalization. Ruger has been slightly more consistent with its growth despite having lower margins than Smith & Wesson. Together they could provide a high enough margin of safety if you believe that guns, not tasers, will be used by law enforcement going forward. That will be the case at least for the foreseeable future.
Disclosure: I do not have any positions in the stocks mentioned in this article.
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