On Thursday evening, Smith & Wesson Holding Corporation (SWHC) reported fourth-quarter earnings that came in better than expected, but the company issued poor forward guidance, causing the stock to drop sharply as trading started.
However, investors changed their minds after an analyst upgrade, and SWHC stock finished Friday roughly flat.
SWHC posted revenue of $181 million, higher than the $175 million Wall Street was expecting to see, and up 6% year-over-year. Adjusted earnings came in at 45 cents per share, again beating Wall Street’s estimate of 35 cents.
Unfortunately, guidance was less positive. SWHC expects EPS of 21 cents to 23 cents per share for the current quarter on revenue of $140 million to $145 million. Analysts had been expecting revenue of $147 million and EPS of 28 cents per share.
The lower-than-expected guidance was to blame for Friday’s early drop, but a quick look into the company’s finances shows why SWHC stock recovered so quickly.
Smith & Wesson reduced inventories by $20 million during the quarter, a goal management had stated earlier in the year and completely pay off its revolving credit line of $100 million. Healthy cash flow of $85 million during the quarter allowed management to pay off the debt which was used to buy the Battenfeld Technologies, a gun accessories manufacturer, back in December.
The company is already seeing a strong return on its investment in Battenfeld. SWHC reported that 8% or $14.6 million of its revenue during the quarter came from the new division. But more importantly, with gun sales leveling out, the accessories market could be the boost Smith & Wesson needs to move the stock higher.
RBC Capital analyst Steven Cahall upgraded SWHC stock to “outperform” and increased his target price from $16 to $21. Cahall noted confidence in the company’s performance and guidance for the current quarter shows recovery for the top line.
Should You Buy SWHC Stock?
Gun stocks tend to move based on fear — it’s important for prospective investors to keep that in mind. Most typically, fears of stricter gun regulations lead to a spike in gun sales, which propel gun stocks for a time. After a while, sales and stocks both cool off.
But that doesn’t mean SWHC stock is only good for short-term trades.
Indeed, investors should view SWHC stock as a long-term buy. Its short-term outlook might not be any better than the broader market, but it should outperform over a longer time frame. Consider that stock is up just 5% for the year-to-date, while the S&P 500 has risen more than 7%. But SWHC stock is up 298% compared to just a 113% gain for the S&P over 5 years.
The biggest downside for SWHC stock is the lack of a dividend. If you like Smith & Wesson as a long-term hold but want more in the way of shareholder returns, consider Sturm, Ruger & Co. Inc. (RGR). RGR’s dividend yield of 2.3% is attractive, especially if you plan to hold the stock for a number of years. Furthermore, RGR has similar five-year performance as SWHC — and a much better 10-year return of 710% compared to 307% for SWHC and just 112% for the S&P 500.
As of this writing, Matt Thalman did not hold positions in any company mentioned above. Follow him on Twitter at @mthalman5513.
