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Smith and Wesson Aiming for a Strong Q4

Smith and Wesson reports earnings after market close on Thursday, March 3rd. We expect that its earnings will be on target for a number of reasons.

Firearms are a big and important business in the United States. Like it or not, whenever there is a shooting, politicians and journalists discuss gun control, and Americans start buying more guns. In the process, investors arm themselves with Smith and Wesson (SWHC) stock. This gives the Springfield, Mass.-based company, Smith and Wesson’s stock a feature that other stocks don’t have: Political sentiment against the company makes the stock more upside volatile than even earnings does.

Expectation

With several mass shootings this quarter, Smith and Wesson is likely expecting to keep having good sales, and analysts are expecting good earnings. For quarter four, which ended in January, analysts are expecting Smith and Wesson to report earnings per share of 38 cents and revenue of $173.64 million. This would be a year-over-year increase of 153 percent and 33 percent respectively! Smith and Wesson’s full year ends in April, and yearly earnings are expected to climb 153 percent as well. Year-over-year revenue is expected to climb by 19 percent.

Smith and Wesson has blown away earnings estimates for eleven straight quarters, and it has been more than three years since the company hasn’t beaten earnings but merely met the consensus. However, the bears would note that analysts are continually getting more bullish on this name by raising their estimates for the quarter and the year, so at some point this company will have to miss. The bulls will point to Smith and Wesson’s closest competitor, Sturm Ruger (RGR), that beat earnings. Gun owners don’t usually have brand loyalty. They usually own more than one firearm, and there no switching cost. Hence, it’s safe to assume that Smith and Wesson will also blow away earnings (in a good way.)

SWHC chart

If Smith and Wesson beats, we can see its price shoot up to $27.00, but a miss could send it down to $23.00, which is a point of vertical consolidation or technical resistance level for the stock.

Technical Notes

Smith and Wesson’s chart is a bit scary, and might convince a bear to call a miss. The stock appears to be forming a double top. As a note, Sturm Ruger was also making a possible double top before its earnings last week, but it broke through that trend to the upside when earnings beat. We expect that Smith and Wesson will do the same.

A cautious investor would point out that Smith and Wesson has been near 60 RSI in the recent future and has pulled back a bit today, the day before earnings. The stock has stayed in overbought territory for extended periods of time in the past, particularly during December when it also had an accumulation of free cash flow from higher gun sales.

During that time, there were talks of additional gun control legislation. The stock fell when management announced they were unloading shares in the company (a trigger to get other investors to also sell), so we don’t know how long it could have stayed in overbought territory. It’s not impossible to get that effect from earnings.

Fundamental Notes

Smith and Wesson has also reported that they’re aiming for a pentagon sidearm contract (along with Glock, Beretta and SIG Sauer). The winner will provide the new pistol for the Air Force and Marines, replacing the Beretta M9.

We placed Smith and Wesson into the SprinkleBit analyzer and discovered that it is roughly fairly valued at its current price. However, better than expected earnings can give analysts a reason to predict higher future free cash flows, which could make it appear undervalued at that point, even though the price is higher. This seems to be the trend with firearms stocks.

SWHC sprinklebit

As a market leader, Smith and Wesson is focusing on making additional acquisitions in order to diversify their business beyond guns and into the $60 billion broader sporting goods industry. Smith and Wesson can now claim roughly 11 percent of its quarterly sales (or roughly $20 million) for sales of outdoor goods, thanks to its 2014 acquisition of Battenfeld Technologies.

Smith and Wesson had an abnormally high amount of positive free cash flows in December (the same time period when the stock was RSI overbought for an extended period of time), which not only gives them additional capital with which to potentially expand their business, but it could be another sign of a strong quarter.

Free Cash Flow SWHC

Five years of Smith and Wesson Free Cash Flow: Y-Charts

Though there is a case for and against pulling the trigger on Smith and Wesson stock into earnings, we believe it will beat consensus, and its stock could jump as high as $27.00.

[Disclosure: I own Smith and Wesson stock.]

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J Rae has been interested in finance since age eight when her grandfather, who started investing in the 40s, started coaching her. She has been an investor since 2006 and a trader since 2013 and focuses on a diversified portfolio of stocks and options. J Rae has almost completed an MBA in Financial Management.

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