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There are two truths about living in a free country with the constitutional guarantee for a right to bear arms. The first truth is that people get murdered. The second truth is that gun control can’t change rule No. 1.
As investors, our job is to remain dispassionate about what happens in the world, and instead focus on what it means for the economy and for stocks. Only with cruel, objective, emotionless analysis can we avoid terrible investing mistakes. Call me cold, but investors must compartmentalize emotion and analysis.
One truth is that when the media or politicians call for gun control, gun sales rise and gun stocks often come along for the ride. We saw shares in Smith & Wesson (NASDAQ: SWHC) and Sturm, Ruger & Co. (NYSE: RGR) skyrocket after the Sandy Hook massacre. Smith & Wesson management has said that gun sales have soared specifically since Obama took office. It’s stock is up almost 800% since that time.
Background checks have increased at a rate of 7% annually since 2007. Some 90% of owners will buy another handgun. In fact, once someone buys a gun, they are likely to average total ownership of eight guns.
Firearms Sales Lead Smith & Wesson Earnings
For the most recent quarter, Smith & Wesson net sales were $143.2 million, up 32.1% over last year. The firearms division accounted for most of these sales, $124.9 million, up 15.2% over last year. The accessories division’s sales rose 24.6% to $18.4 million.
Gross margin for the quarter posted an astounding increase of 710 bps, to 39.2% compared with 32.1% last year. Net income also exploded to $14.2 million, up almost 150% over last year’s $5.2 million.
The Smith & Wesson earnings report said the company generated $23 million in operating cash flow and $8.6 million in free cash flow. It expect earnings per share of $1.16 to $1.31 in fiscal 2016. The company sits on $54 million in cash, and no debt.
Smith & Wesson has a specific strategic plan going forward, and has since 2012. Next year it will aim to vertically integrate its business, provide a continuous cycle of major product launches when ready and at regular intervals, carefully examine how to grow the accessories market, look for more opportunities to supply the military, and assess how best to use its excess capital.
Smith & Wesson purchased accessories company Battenfeld Technologies in a $130 million all-cash deal. Battenfeld is the leader in hunting and shooting accessories. It has 18% compound annual growth rate in sales from 2006 to 2014, over 50% gross margins, and will be accretive in 2016.
Smith & Wesson is hot for the military market. It has partnered with General Dynamics (NYSE: GD) to submit the next generation 9mm pistol.
New Highs Ahead for Smith & Wesson?
Smith & Wesson has a lot going for it in the market. It is the No. 1 in brand awareness for firearms, and its guns are rated highest for reliability, durability, and accuracy. On the revolver market, literally every other gun is a Smith & Wesson.
The company has an outstanding distribution system. It sells to 14 distributors, which in turn pushes the products out to more than 10,000 independent retailers. Smith & Wesson sells to six big-box retailers. It also sells to two buying groups, which service 600 member firearm retailers.
As of now, the stock is trading at its all-time high. It often issues a special dividend. I think it may be on its way to new highs.
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