Gun stocks took a double-barreled shot of bad news when Smith & Wesson (SWHC) slashed its outlook just a day after a child accidentally killed an instructor at a gun range.
SWHC stock predictably plunged on the guidance cut, dragging shares of rival Sturm, Ruger (RGR) with it.
The big whammy for Wednesday’s selloff was SWHC earnings and outlook, but the shocking shooting in Arizona got most of the attention in the press.
A 9-year-old girl accidentally shot an Arizona shooting instructor with an Uzi. Although debates over gun safety and availability can boost sales, it’s hardly good PR for the industry.
After all, how does this sound? “Guns don’t kill people; 9-year-old girls kill people.”
The incident comes during an already disappointing time for guns stocks. SWHC stock plunged more than 13% in early trades, deepening its year-to-date loss. As recently as two months ago, SWHC stock was up more than 20% for 2014.
Ruger stock, meanwhile, has never looked that good this year. It fell nearly 4% in early trading, but then RGR stock was already off more than 30% for the year-to-date.
SWHC Struggles With Inventory
As ugly as the Arizona shooting may be, SWHC’s real problem is a glut of long guns.
This is the second time in as many months that Smith & Wesson has had to cut its sales outlook because of lower sales. SWHC said high inventories of modern sporting rifles industry-wide are clobbering results, even as handgun sales continue to grow.
And that’s the real headwind for SWHC stock. The threat of tough new federal restrictions on gun sales — particularly long guns like modern sporting rifles — led to a frenzy of sales.
But with that legislation going nowhere, the threat of restrictions disappeared and the rush of gun sales cooled off with it.
It’s going to take some time for the SWHC and its industry partners to work off the inventory, which is why its sales outlook is weak this year. As strong as sales of handguns might be thanks to changes to concealed carry laws, lower demand for rifles is going to weigh on SWHC’s top and bottom lines. Both earnings and revenue are forecast to decline.
Smith & Wesson will work it’s way out of the inventory challenge, but not until next year.
Until then, expect a rocky road for SWHC and RGR stocks.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.