Smith & Wesson: Zacks’Bull of the Day Play

While at times controversial, guns are a fixture in America, and have seen massive surges in purchases over the past several years.  With each news story about terrorism, or some government official talking about taking away gun owners’ rights, gun sales soar.  Gun manufactures have seen huge increases in total sales not just in firearms, but accessories as well.  Therefore, Smith & Wesson (SWHCSnapshot Report) is the Zacks Bull of the Day.

This Zacks Rank #1 (Strong Buy) is one of the world’s leading producers of quality handguns, law enforcement products and firearm safety and security products. Law enforcement personnel, military personnel, target shooters, hunters, collectors and firearms enthusiasts throughout the world have used the company’s products with confidence for 150 years. Smith & Wesson Corp. also manufactures and markets Smith & Wesson branded handcuffs and other products utilizing its metal working expertise and providing products and services too many external customers.

In their most recent earnings announcement, the company significantly beat both the Zacks Consensus Earnings and Revenue estimates by posting year over year gains in quarterly net sales (+61.5%), and quarterly GAAP net income (+287%).  Specifically, the firearms division saw net sales improve +54.4% YoY, with sales of handguns up +56.5%, and long gun sales up 85.6%.  The accessories division had net sales improve +163.9% over the same time period.  Also, management was also able to increase gross margins from 33.6% to 41.1%.

According to James Debney, President and CEO, “The combined strength of our firearms and accessories businesses delivered an exceptional performance, driven by healthy consumer demand across our growing portfolio of firearm and outdoor lifestyle offerings. During the third quarter, the Adjusted National Instant Criminal Background Check System (NICS) data, which serves as an indicator of consumer purchases, reported a significant increase in growth versus the prior year, especially in handguns. In addition, our product sell-through at distribution was much stronger than we had anticipated. Our flexible manufacturing model, combined with our ability to successfully utilize the internal inventories we had built in anticipation of potential sell-through strength, allowed us to capture incremental sales in the third quarter. Despite the fact that we entered our fourth quarter with lower inventories, we are focused on increasing the production rates of our key products during the fourth quarter and we are therefore increasing our guidance for the full fiscal year.”

Due to the strong quarter, management raised both non-GAAP EPS guidance for FY 16, and revenues as well.  Non-GAAP guidance was raised from a range of $1.36-$1.41 to a range of $1.68-$1.70.  The top-line guidance was lifted from a range of $650-$660 million to a range of $712-$717 million.

As you can see from the graph below, Smith & Wesson has a very strong history of beating earnings expectations, and has seen nice price bumps after each announcement.  You have to go back to 2011 for the last time they missed expectations.

Increasing Estimates

Due to the improved guidance by management, and their stellar quarterly performance, estimates for Q4 16, Q1 17, FY 16 and FY 17 have all seen upgrades over the past 30 days; Q4 16 rose from $0.47 to $0.54, FY 16 improved from $1.42 to $1.70, Q1 17 was raised from $0.34 to $0.36, and FY 17 jumped up from $1.52 to $1.73.

Bottom Line

A recent report by the FBI regarding firearm background checks stated that in February 2016 they did 2.6 million checks which was slightly down from their record month of 3.3 million in December 2015.  Further, the FBI stated that they did 23.1 million checks in 2015, and expect that number to rise +6.5% for 2016.  Which indicates that they expect gun sales to continue to rise throughout 2016.  This coupled with management’s estimate upgrades has SWHC looking good in 2016 and beyond.

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