Smith & Wesson (SWHC) Sinks on Sour Guidance

Shares of gunmaker Smith & Wesson (SWHC) plunged last week, although the company topped expectations on both earnings and revenue. During its first quarter, Smith & Wesson earned an adjusted $0.40 per share, a 42.9% year-on-year increase that topped the consensus estimate of $0.36. Revenue rose 25.74% to $171, also beating the $165 million that analysts had expected. Daily Chart

The company attributed its strong top and bottom line performance to continued robust sales of its M&P (military and police) products.
Gross margin rose from 40.1% to 45.0%, due to a better product mix that resulted in wider margins. Operating income also climbed 52.6%. The company also finished the quarter with $146.5 million in cash and equivalents, compared to $100.5 million in the prior year quarter. By all accounts, Smith & Wesson had outgrown the negative publicity the company received after the tragic shootings at Sandy Hook Elementary, which resulted in a public outcry for increased bans on firearms. Assault rifles, a major part of Smith & Wesson's M&P portfolio, were specifically targeted, and some analysts believed that it could have sliced more than 20% off the company's full-year earnings. Its primary competitor, Sturm, Ruger & Company (RGR), suffered less, thanks to a portfolio primarily focused on small firearms and hunting rifles. Smith & Wesson continues to invest heavily in R&D for new products to enhance its firearms portfolio and possibly diversify away from the heavier weapons that are prone to increased legislation. Although Smith & Wesson posted a solid quarter, its guidance was less stellar. The company now expects second quarter GAAP-adjusted earnings to fall between $0.20 to $0.22 per share, missing the consensus estimate of $0.29. Second quarter revenue is anticipated between $135 million to $140 million, also lower than the $143 million that analysts had expected. That lower-than-expected guidance caused shares to slide more than 8% immediately afterward. The stock now trades at 7.97 times forward earnings with a 5-year PEG ratio of 0.29 -- which makes it a very undervalued growth stock, if analysts long-term estimates are to be believed. Ruger, by comparison, trades at 15.48 times forward earnings -- nearly twice as expensive as Smith & Wesson. However, Ruger might be a better pick for income investors, since it pays a quarterly dividend of $0.65 per share -- a 3.54% yield at current prices. Other News About SWHC Smith & Wesson Shares Fall as Gun 'Frenzy' Wanes Why are Americans buying less guns than before? Smith & Wesson Posts 1Q Beat as Strong Demand Continues Smith & Wesson posts strong growth, but guidance falls short. Other Stocks in the News A Fundamental Breakdown of 3 Major EHR Companies Which of these three EHR companies is the best buy? These Companies Are Creating the Hospital of the Future Will these companies modernize healthcare? Copyright 2013 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Sep 12, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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