Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Smith & Wesson Holding Corporation (SWHC): Here’s What Gives

Smith & Wesson Holding Corporation (NASDAQ:SWHC) blew analyst earnings estimates clean out of the water last week. Fiscal Q1 2014 sales of $171 million were up 26% in comparison with fiscal Q1 2013. Per-share earnings of $0.40 were nearly half again what S&W had earned in the year-ago quarter. Yet no sooner did investors see the results, than they sold off S&W stock by more than 10%.

What gives?

The Smith & Wesson BODYGUARD .38 Revolver, Source: Smith & Wesson.

Here’s what gives

In any earnings report, there are any number of ways to interpret the numbers. Over the next 400 words or so, I’ll tell you how I think investors looked at Smith & Wesson’s results, and why they got spooked. Then I’ll tell you how you should look at the numbers — and why they make this stock look so attractive.

Let’s start with last quarter, when Smith & Wesson told investors to expect sales of about $165 million, and earnings of no more than $0.37 in fiscal Q1 2014. In fact, the company delivered $0.40 per share on $171 million in revenues. Thus, Smith & Wesson Holding Corporation (NASDAQ:SWHC) beat not only analyst estimates last week — but its own best guess as well. Kudos.

Problem is, looking farther out, Smith & Wesson Holding Corporation (NASDAQ:SWHC) warned that with its distribution agreement with Walther ending, it expected full-year 2014 revenues exceed 2013’s by only 4%. Even so, the company said revenues of $610 million looked achievable, and earnings of maybe $1.32.

Management’s latest guidance now calls for $615 million in revenues at the midpoint, up $5 million from last quarter’s guess. This implies that some — but not all — of the Q1’s “extra” sales were stolen from Q2. The fact that Smith & Wesson Holding Corporation (NASDAQ:SWHC) upped its guidance by less than the $6 million extra revenue booked in Q1 suggests the company doesn’t see Q1’s robust sales as part of a trend that will run throughout the year.

What’s more, Smith & Wesson Holding Corporation (NASDAQ:SWHC) left its earnings guidance intact at $1.30 to $1.35 for the year. That means management gave itself no credit whatsoever for the extra $0.03 earned in Q1. It didn’t increase guidance at all. Viewed from this perspective, you can see why investors got nervous.

Now look at it the right way

All that being said, I still think investors are wrong to shy away from Smith & Wesson stock. Priced at less than 9 times earnings, and projected to grow earnings at 30% annually over the next five years, the stock looks like a pretty compelling “buy.”

Granted, those numbers are probably bunk. Real free cash flow at the company was only $60 million for the past 12 months, barely two-thirds of reported “GAAP” income. And with the threat that Congress will impose significant gun ownership restrictions mostly removed, I don’t see as much urgency among firearms aficionados, needing to run out and buy guns these days. The gun industry as a whole is now only expected to grow earnings at about 13% annually over the next half-decade — there’s just no reason to expect S&W to grow twice as fast as Ruger, Glock, Beretta, and the rest.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.