Smith & Wesson (SWHC) will announce earnings after the close today. With forecasts putting earnings at a spectacular 10 cents per share — a 100% increase over the same quarter last year — and the stock enjoying a 133% rise since the beginning of the year, the question is how much further can SWHC go?
Some investors are worried that gun sales may be flattening, or even falling. Smith & Wesson certainly enjoyed a nice boost when the current Administration came to power and again when Supreme Court Justice Sonya Sotomayor was nominated.
But many analysts believe that the federal government has enough to do right now, and that taking on millions of firearms owners and the powerful National Rifle Association is not near the top of the Obama “to do” list.
Analysts who cover Smith & Wesson expect the firm’s July quarter to be a good one. In addition to the healthy forecasted earnings increase, sales are expected to rise 20% to $97 million. At the current stock price of $5.33, Smith & Wesson trades at less than one time sales, which would appear to be cheap for a firm that is so profitable.
But trends in firearm sales may actually make the stock relatively expensive.
Smith & Wesson Earnings Momentum Questionable
FBI statistics show that sales of handguns jumped right after the Obama inauguration. That was probably due to a panic about regulation. Background checks for gun sales in April were up 30% over the same month a year ago. Yet that figure is expected to be up only 7% in August according to the AP. If that figure stays low, the question is whether Smith & Wesson can keep its earnings momentum.
The company’s challenge is to make up for flattening sales to individual pistol owners with sales of rifles to hunters and guns sales to police departments and the federal government.
Smith & Wesson hunting firearm sales fell by about a third last fiscal year. The company appears to have come up with a reasonable way to address that problem by offering lower-priced weapons. The combination of an appeal to budget-conscious hunters and a recovering economy should lift this segment of the firm’s business during the remainder of this year. But it may be asking too much for rifle sales to make up for the drop in handgun units.
Sales to police forces and the federal government were a modest part of the company’s overall revenue in the fiscal year that ended in April, about 8% of Smith & Wesson’s $335 million. A shipment of weapons to Afghanistan helped military sales during the 2007 fiscal. It is anyone’s guess whether the government will place an order that size again.
National crime rate trends are not likely to help sales to local law enforcement. Figures from the Bureau of Justice Statistics for 2008 show that the incidence of violent crime in American is at a ten-year low.
In addition, pressure on local government tax receipts is leading to layoffs of police officers. State and municipal tax income may not rebound for over a year, which means tighter police budgets. That does not work in Smith & Wesson’s favor.
Gun sales to consumers are not likely to get worse over the next year, at least if registration data is a reasonable indication. But the same information indicates that these sales are not likely to get any better either. Government budget issues are likely to curtail improvement in Smith & Wesson’s revenue from that sector.
Smith & Wesson is a good company. It has a solid balance sheet and should stay profitable for the balance of its new fiscal year. But, there is very little reason to think that it is on a path to significant growth.
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