Wedbush Downgrades Smith & Wesson, Difficult To Discern How Much Gun Sales Are Incremental Or Pulled-Forward

• Shares of Smith & Wesson Holding Corp SWHC have surged 172.78 percent over the past year, rising to a high of $25.86 on Monday.
• Wedbush’s James Hardiman has downgraded the rating on the company from Outperform to Neutral, while raising the price target from $24 to $26.
• The downgrade is based on the “healthy” valuation of the stock, following the more than 150 percent surge in the share price over the past year.

According to the Wedbush report, “While gun industry sales are clearly in ‘surge’ mode, it is difficult to discern just how much of these sales are in fact incremental to the industry versus pulled-forward demand, with plenty of historical examples of both.”

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Smith and Wesson announced an increase in its non-GAAP EPS guidance for 3Q16 and FY16 after market close on January 4. Management now expects the 3Q EPS at $0.39-$0.41, twice that reported a year ago and significantly higher than the previous guidance, as well as the consensus and estimate. Q3 sales are now expected at $175-$180 million, also ahead of the estimate and the consensus.

Analyst James Hardiman explained that this revision “comes on the heels of extremely strong background check (NICS) data, up 38 percent in the month of December, a significant acceleration versus the 8% growth in November.”

Hardiman also mentioned that based on the Q2 performance, the company was likely to see significant market share gains in both handguns and long guns.

The EPS estimates for FY16 and FY17 have been raised from $1.34 to $1.47 and from $1.47 to $1.55, respectively.

Disclosure: Javier Hasse holds no stakes in any of the securities mentioned above.

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