Pull the Trigger on Smith & Wesson

Whenever there’s a discussion about guns, you’re sure to find a lot of emotion, passion and politics. Second Amendment supporters are earnest and active in their advocacy of the right to bear arms, yet equally passionate are gun control advocates who argue that easy access to firearms is what’s responsible for much of the violence and crime in America.

The pendulum on this debate tends to swing swiftly in both directions, and it’s usually headline-driven. These headlines also tend to influence the fortunes of gun stocks.

The tragic events in Tucson, Ariz., in January, where a gunman killed six people and injured 12 others, including Arizona Congresswoman Gabrielle Giffords, was the latest high-profile incident that heated up the gun debate.

In the days immediately following the Arizona tragedy, the two main publicly traded firearms companies — Sturm Ruger (NYSE:RGR) and Smith & Wesson (NASDAQ:SWHC) — both saw a spike in their share price. That spike was short-lived, however, and since then we’ve seen a divergence in the fortunes of the two gun makers.

Interestingly, the reason for this divergence has little to do with the reaction on the politics of the gun debate, and much more to do with the fundamental strength of each company.

In the case of Sturm Ruger, makers of the Ruger brand pistols, rifles and shotguns, the company has hit the earnings bullseye. In February, it posted fourth-quarter earnings of 30 cents a share on strong sales of $64.1 million. Both top- and bottom-line numbers bested Wall Street expectations.

The chart below shows just how bullish traders have been on RGR shares since the Feb. 23 earnings release.

It’s been nearly the opposite story with rival gun maker Smith & Wesson. On March 10, the company reported fiscal third-quarter earnings that completely missed the target. For the three months that ended Jan. 31, Smith & Wesson lost $52.8 million. That’s a far cry from the $3.1 million the company earned in the same quarter a year ago. Revenue also was down for the quarter.

Now to be fair, it wasn’t Smith & Wesson’s firearms division that misfired. In fact, revenue from the company’s primary division climbed to $79.2 million from $74.7 million a year earlier. The drag on Smith came from its perimeter security division, which saw a 38% drop in revenue as businesses and the government spent less on its perimeter security systems.

The chart here shows just how much SWHC shares were punished by investors after the poor quarterly results.

To give you a sense of how much divergence there’s been between Sturm Ruger and Smith & Wesson, consider that over the last three months RGR is up 36.3%, while SWHC is down 6.6%. This basically tells you all you need to know when it comes to selecting which firearms stock is the better one to own.

If Smith & Wesson can shore up its security division, the shares might improve their earnings aim. Until then, however, Sturm Ruger is the firearms maker investors should pull the trigger on.

Disclosure: At the time of this writing, Jim Woods held no positions in any of the stocks mentioned here. He does, however, own a Ruger SP101, and a Smith & Wesson SW19

Article printed from InvestorPlace Media, https://investorplace.com/2011/04/pull-the-trigger-on-smith-wesson/.

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