Smith & Wesson (SWHC) Loses Its Bang, Shares Plummet 11%

by Ryan Fitzwater, Director of Research, The Oxford Club
StockGrader

Over the last three years, Smith & Wesson (Nasdaq: SWHC) shares have been on a wild ride, shooting up over 348%. But the gun manufacturer completely missed the target in its most recent quarter. Shares are down over 11% today as a result.

One of the main culprits in today’s share plunge is due to the company slashing its full-year expectations. Smith & Wesson now expects its fiscal 2015 full-year revenue to clock in between $530 million to $540 million, substantially below Wall Street’s estimates of $593 million, and way off target from the $585 million to $600 million the company itself quoted in June.

Smith & Wesson sites that shrinking demand for rifles and an overabundance of inventory industrywide lead to sales dropping $39.2 million over the same period last year.

And while first quarter EPS of $0.26 beat the estimates of $0.25, it was still a 35% drop year over year. The company also cut its EPS guidance from the original range of $1.30 to $1.40 down to $0.89 to $0.94 as a result.

CEO James Debney stated, "We believe that the current environment reflects high inventories industrywide resulting from channel replenishment that occurred following an earlier surge in consumer buying. That environment, combined with typical seasonality that slows consumer buying activity during the summer, is causing us to lower our financial outlook for fiscal 2015."

Over the last few years, the gun industry experienced a fantastic advancement in demand due to concerns of increased gun regulations. But President Obama has had trouble getting a tighter gun restriction bill through Congress and demand has dropped off as a result.

 

Debney tried his best to highlight some silver lining, noting that while rifle demand is down, there is continued demand for handguns, including revolvers and concealed-carry polymer pistols. He added, "We expect the industry will continue to deliver growth over the long term."

While the gun rally is losing steam, no one can predict what the future holds. Gun regulation talk could pop back into the limelight again without any warning or it could continue to slowly fade away. Not to mention, demand could pick up or drop off due to reasons outside of the gun regulation debate.

With the future unknown, it is best to see how Smith & Wesson performs from a fundamental perspective with our Investment U Fundamental Factor Test. It will help us gauge whether today’s drop in share price signals a great time to buy, sell or hold:

 

Earnings-per-Share (EPS) Growth: As we already noted above, Smith & Wesson saw a 35% drop in the most recent quarter compared to the same period last year. Not what we want to see.

Price-to-Earnings (P/E) Ratio: Smith & Wesson’s P/E of 8.90 is more than half the industry average that stands at 19.66.

Debt-to-Equity We don’t want to see a company over leveraging itself which might be the case with Smith & Wesson. Its debt-to-equity ratio of 114.41% is substantially higher than the industry average of 74.46%. You can bet it is hoping demand will pick up so it can cover its bills.

 Free Cash Flow Per Share Growth: In the most recent quarter, the company saw a $3.8 million drop in free cash flow. We want to see free cash flow increasing not decreasing.

Profit Margins Smith & Wesson breaks the bad streak here. The industry is averaging profit margins of 6.64%, while Smith & Wesson clocks in at 11.04%.

 Return on Equity Two in a row here. The company’s 44.53% return on equity is almost double the industry’s average that stands at 26.15%.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

C:Hold (Hits just three key metrics)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That's why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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