Smith & Wesson Holding Corporation (NASDAQ:SWHC)’s stock is up almost 140% in 2012 (and 328% since a year ago), bringing the company’s market capitalization over $700 million (with average daily volume over the last three months at 2.5 million shares and a current per-share price of about $10.70, there should be plenty of liquidity for small to medium investors). Handguns and rifles are big business these days, with the company announcing a 48% increase in revenue in its most recent quarterly report compared to the same period in 2011. Yet John Furman, a Board member at Smith & Wesson, hasn’t been taking profits. Furman, who was buying the stock this past March at $6.80 per share, bought an additional 1,500 shares on September 25th through his defined benefit pension trust at an average price of $10.43. See more insider purchases and sales from John Furman.
We would note that a number of insiders at Smith & Wesson Holding Corporation have been selling shares (research insider sales at Smith & Wesson), and so that makes us a bit cautious, but it is possible that they are just taking cash profits from the rise of the stock rather than expressing an expectation that business is about to get worse. Renaissance Technologies, which made its founder Jim Simons a multi-billionaire, increased its stake in Smith & Wesson during the second quarter to 2.2 million shares but this was only a small piece of the enormous fund’s portfolio (find some larger holdings of Renaissance Technologies from last quarter).
We’ve discussed the rise in Smith & Wesson’s revenues during the first quarter of its current fiscal year (the fiscal year ends in April, with Q1 ending in July). The company reported about $18 million in net income during the same period, compared to about $800,000 during the first quarter of the last fiscal year. Every category of the company’s firearms business showed an improvement in sales, with handguns- the largest source of business- doing well and sales of sporting rifles doubling. We think it’s an open question as to how sustainable this growth is; perhaps consumers are buying guns ahead of the U.S. elections out of concern that it will be harder to do so if President Obama is re-elected. Whether they are right (and gun sales fall) or wrong (in which case they would probably stay at about the same level of sales or decline) this would indicate slower growth for Smith & Wesson Holding Corporation if this is in fact what is driving sales growth. Wall Street analysts, meanwhile, are confident in future growth: the stock’s forward P/E multiple is a moderately cheap 11 and its five-year PEG ratio is 0.6, implying that the sell-side considers the stock significantly undervalued. Based on trailing earnings, however, the P/E is 22- not exactly cheap, and certainly requiring future growth to justify the current price.
Smith & Wesson can best be compared to fellow firearms manufacturer Sturm, Ruger & Company (NYSE:RGR) and TASER International, Inc. (NASDAQ:TASR). Sturm, Ruger & Company’s stock is “only” up 90% in the last year; it too saw large increases in revenue (50%) and earnings (67%) last quarter versus a year ago. It is actually a bit cheaper than Smith & Wesson on a trailing basis, at a P/E of 18, and it pays a 3.1% dividend yield. Growth expectations aren’t as high with a forward P/E of 16, but it’s hard to understand why it would so substantially underperform Smith & Wesson going forward; therefore, it might be a better value stock. TASER is priced for high growth at 29 times forward earnings; its revenues were up 33% in the second quarter of 2012 compared to the same period in 2011 but we think the firearm manufacturers are still better values.
Cabelas Inc (NYSE:CAB) is a sporting goods store that is particularly notable for selling hunting equipment including guns, while Dicks Sporting Goods Inc (NYSE:DKS), while larger and generally more diversified, also provides hunting equipment. The retailers are also more expensive than the handgun companies on a trailing basis, as they trade at respective P/E multiples of 23 and 25. Their quarterly growth numbers compared to the same period last year are about 10%- high, and possibly more sustainable than increases in gun sales, but we’re still skeptical of their value.