Smith & Wesson Earnings Preview: Have Sales Peaked?

Smith & Wesson DG, shares of which slumped in August following suggestions that the surge in gun sales might have peaked, is scheduled to report its first-quarter fiscal 2014 results Thursday, September 5, after the markets close. Investors will be watching to see whether the company's earnings have peaked too, now that concerns over the possibility of stronger gun laws have abated. One sign will be whether Smith & Wesson still plans to expand its capacity. Competitor Sturm, Ruger RGR purchased a manufacturing facility this summer. Expectations Analysts on average predict that Smith & Wesson will report its revenue for the first quarter rose more than 21 percent year-over-year to $165.02 million. The forecast also calls for per-share earnings to come to $0.36. That would be up from $0.28 per share in the same quarter of last year, but down from $0.44 in the fourth quarter. That consensus earnings estimate is unchanged in the past 60 days, suggesting that analysts are confident in their assessment. Also note that Smith & Wesson earnings have not fallen short of consensus estimates for the past ten quarters, though EPS were in line with expectations in the fourth quarter. Smith & Wesson attributed strong results in the first quarter to record sales. Despite increased capacity, it said, it was unable to keep up with demand. The company offered earnings per share (EPS) and sales guidance for the coming fiscal year that was above analysts' forecasts. Yet, the share price pulled back about two percent following the fourth-quarter report, though it quickly recovered. Looking ahead to the current quarter, the analysts' consensus forecast calls for more modest year-over-year growth of revenue and earnings. So far, full-year EPS are expected to more than six percent higher, relative to the previous year, on a rise of more than four percent in revenues. The Company Smith & Wesson is a leading firearms manufacturer in the United States. It also produces ammunition and licenses its trademarks to third parties. Customers include gun enthusiasts, collectors, hunters, competitive shooters, law enforcement, security agencies and the military. The company has a market capitalization near $710 million. It was founded in 1837 and now is based in Springfield, Massachusetts. James Debney has been the president and chief executive since September 2011. Competitors include Olin OLN, Sturm, Ruger and TASER International TASR. The former two are expected to post strong EPS and revenue growth when they next report quarterly results in October. Analysts predict that EPS growth from TASER will be modest, relative to a year ago. During the three months that ended in July, Smith & Wesson released preliminary fourth-quarter sales numbers that pleased investors and it announced a $100 million stock repurchase plan. Performance The company has a long-term EPS growth forecast of about 30 percent, as well as a price-to-earnings (P/E) ratio that is less than the industry average. Its operating margin is greater than the industry average, and the return on equity is more than 49 percent. The number of Smith & Wesson shares sold short, as of the August 15 settlement date, represents more than 21 percent of the float. That was the highest level of short interest since April, after rising more than seven percent from the previous period. The days to cover fell from about seven to more than four during the period. The consensus recommendation of the analysts surveyed by Thomson/First Call who follow the stock is to hold shares, and it has been for at least three months. The analysts believe the stock has some room to run, though, as their mean price target represents about 11 percent potential upside. However, that target price is less than the recent multiyear high. Shares have retreated more than 16 percent from that high in early August. The share price is still more than 27 percent higher year-to-date, and it is above the 200-day moving average. Over the past six months, the stock has outperformed Olin and Sturm, Ruger, but its performance has been in line with the S&P 500. At the time of this writing, the author had no position in the mentioned equities. See also: Don't Be a Jerk! You'll Make More Money