Buy Smith & Wesson Holding Corp (SWHC) for Its Hard Core

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Gun stocks are curious beasts. They are subject to regular secular demand for firearms, but are buffeted by news items, such as the horrific shootings in Orlando. Traditionally, when such terrible events occur during a Democratic administration, the stocks run higher on fears of government interference with the Second Amendment.

Buy Smith & Wesson Holding Corp (SWHC) for Its Hard CoreThat’s not exactly a reason to rush out and buy gun stocks. Had you put in a market order on the open for Monday, you would have bought Smith & Wesson Holding Corp (SWHC) stock at $23.40 but closed the day at $22.88.

News-driven demand in this sector tends to artificially move SWHC stock as long as the issue remains in the news. Shortly after the Connecticut school shooting in 2012, there was a big move in SWHC stock and it stayed in its uptrend for quite some time as Congress deliberated legislation, which drove demand higher.

That demand continued higher than normal for some time, but when it dropped back to regular levels, year-over-year comparisons fell and so did SWHC stock.

Is SWHC Stock Worth a Look Now?

What about SWHC for the long term? For that, you can get a good sense of both macro demand and Smith & Wesson itself from March’s annual report. SWHC has the highest brand awareness of all gun manufacturers, and is the most owned revolver brand in the market. Literally half of all revolvers owned are Smith & Wesson.

SWHC sells through a variety of outlets. They have 14 distributors which, in turn, spin out guns to over 10,000 independent retailers that account for 64% of consumer sales. You can buy their products in six big box stores, including Dick’s Sporting Goods Inc (DKS). They have two buying groups that push product to 600 retailers, and sell accessories online.

One of the predictors of gun purchases is the number of background checks performed by the National Shooting Sports Foundation. Although that number ebbs and flows from quarter to quarter, the total has risen from 9.17 million in fiscal year 2010 to 12.58 million in FY16. It peaked in FY13 after Sandy Hook at 15.56 million. The bottom line here is that demand remains robust.

On a calendar year basis, the handgun data is even more robust, rising from 9 million in 2008 to 14.2 million in 2015, and is up 16.2% year over year.

SWHC has been in the midst of a long-term strategic growth initiative for several years, and obviously it seems to be paying off. SWHC has expanded into the rugged outdoor market, as well as acquired firearm-related and outdoor accessories company Battenfeld.

Next, the company plans to create to new division focusing on manufacturing and “shared services,” meaning finance, HR, legal, IT and logistics to assist in the company’s other divisions.

So let’s look beyond SWHC stock earnings, which come this week, and try to look further into the future. SWHC has stated in past presentations that once a person buys one gun, they are highly likely to purchase not just one more, but several. Most gun owners, according to SWHC, own about seven firearms.

Cash flow is strong at the company, and it was able to repay a $100 million loan it took for the aforementioned acquisition in a mere four months. It continues to buy back stock.

SWHC stock has a recent all-time high of $30.44. At $22.88, it is higher than it has traditionally traded, but it appears that is with good reason. So now you have to make a decision.

If you are a long-term investor, you can probably buy here and feel good about the purchase. The biggest long-term risk is that a fifth left-wing judge gets placed on the Supreme Court, and the second Amendment is severely curtailed. Sales will explode initially but they may drop over time. It’s hard to know because we are speculating.

If you are more conservative, it can be argued that SWHC is a bit pricey from an historical standpoint, and you should consider selling, or not buying. Historically, SWHC stock corrects after run ups such as it has had since bottoming in late 2014.

As of this writing, Lawrence Meyers had no position in any stock mentioned.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/long-term-view-swhc-stock/.

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