Smith & Wesson's Gone as High as It Can; Sell Before It Reports
NEW YORK (TheStreet) -- Smith & Wesson (SWHC) will report fiscal second-quarter earnings results Tuesday after the closing bell. While shares of the 162-year-old gun manufacturer have shown considerable volatility, since we last recommended the stock in October, they've gained more than 35%.
Despite these gains, which have soundly beaten the broader averages, analysts remain bullish. But smart investors shouldn't press their luck. Pull the trigger on a sell order before Tuesday's results, lock in some profits, and then wait to hear what the company says about its outlook for 2015.
Shares of the Springfield, Mass.-based company closed Friday at $13.53, down 1.24%. But the shares are up 43% year-to-date, demolishing every important index on the market, including the 1.74% and 2.21% gains in the Dow Jones Industrial Average (DJI) and the S&P 500 I:GSPC, respectively.
SWHC 1 Year Total Returns (Daily)
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Despite those gains, the stock looks cheap, trading at a trailing price-to-earnings ratio of 11 -- barely over half the average trailing multiple of S&P 500 stocks, which stands at 21. What investors need to remember, however, is that the stock -- despite its gains -- is still cheap for a reason.
As the stock has climbed, the company's earnings estimates have fallen -- revised down 45%, from 20 cents per share at the end of the last quarter to 11 cents per share now. The same applies to full-year earnings estimates, which are down 21%, from 89 cents three months ago to 70 cents today. This is because Smith & Wesson has posted year-over-year earnings declines and revenue declines in the last three quarters. Among the things hurting the company -- and the industry -- has been the overhang of gun-control regulation, including political debates about the legal meaning of the Second Amendment.
It's not that Smith & Wesson stock has soundly beaten the market because of its strong operational performances. Rather, the stock is just now recovering from the brutal punishment it absorbed due to earlier weak results. This includes the period when we last made a buy recommendation -- just after the stock bottomed at $9.03 on October 3. But holding the shares after those gains is too now risky. The company's operational results aren't expected to drastically improve, if analysts' estimates serve as indication. Indeed, the reverse is likely.
For the quarter that ended in January, analysts expect earnings to decline more than 68% year-over-year to 11 cents per share. Revenue is projected to fall more than 15% year over year to $123.3 million. For the full year, ending in April, both earning and revenue are expected to decline 53% and 16%, respectively.
This venerable American company isn't in any danger of disappearing any time soon. And Smith & Wesson, well-known for its innovation, still has time to turn things around. But what could disappear quickly are the paper profits investors have on the table, unless the company hits its targets Tuesday. And that's not a risk worth taking.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.