Have We Passed Peak Smith & Wesson?

NEW YORK (TheStreet) -- Since late in 2011, Smith & Wesson Holding  (SWHC) has been a stock on a tear.

The stock was selling at well under $3 per share as late as November 25, 2011. In early January, it peaked at about $15. It now trades at slightly under $12 a share.

Management can hardly be blamed. The stock looks dirt cheap, with a price-earnings multiple of 8.4. Revenue around 42.5%from 2012 to 2013. It reported net income of $81.4 million out of last year's $587.5 million in sales. (Smith & Wesson reports on a May fiscal year, so the most recent fiscal year ended in April.)

The company is in the process of buying back $100 million in shares, and has a current market cap of $667 million. 

But it's increasingly likely we have reached peak gun.

Quarterly revenue peaked in the fiscal fourth quarter of last year, at $178.72 million, and stood at $139.29 million for the quarter ended October. The company reports its January quarter after the bell Tuesday.

Part of the problem for Smith & Wesson is demographics. While sales spike when gun restrictions are a political issue, they tend to fall back after the scare is over. Pew Research has tracked a steady decrease in the percentage of Americans who have guns in their home, from 49% in 1974 to 34% in 2012.

Gun ownership tends to be highest among older, white citizens in rural areas, according to the survey, and gun owners skew Republican.

Mass shootings and calls for gun-sale restrictions have the perverse effect of causing gun sales to spike, but can Smith & Wesson continue making a growth case based on that kind of fear?

Smith & Wesson is best known for handguns, and its biggest problem may be competition within the niche from Sturm, Ruger & Co. (RGR), which is up 600% in value over the last five years, triple the gain found in Smith & Wesson.

Sturm, Ruger passed Smith & Wesson in total sales during 2012, and seems to be extending its lead. It reported its Christmas quarter and full-year sales a month ago, $181.9 million for the three months, with full-year sales of $688.28 million. RGR also brings more of its revenue to the bottom line, with net income reaching $26.57 million for the Christmas quarter.

Sturm, Ruger recently bought its third manufacturing plant, in North Carolina, to go along with plants in New Hampshire and Arizona. Smith & Wesson's plants are concentrated in New England.

Analysts are basing their current year estimates for Smith & Wesson on a P/E of 10, which is 15% higher than what it actually is, making the stock vulnerable to a pullback if sales for the Christmas quarter disappoint. Expectations are high for the industry as a whole, according to USA Today

But stock buyers don't buy yesterday. They buy tomorrow. In order to keep sales rising, companies like Smith & Wesson have to reverse current gun purchase demographics. The National Rifle Association, which represents the whole industry, has been phenomenally effective.

But with crime down in most parts of the country, according to FBI statistics announced last month, from where is the growth coming?

It's hard to see it coming from higher prices. Even The Shooter's Log calls current prices for the most deadly firearms "cheaper than dirt." 

Gun control seems to have disappeared from the political agenda, so that spike is gone from the market. Crime is heading down, so that cause is leaving the market. The demographics of gun ownership are not changing. Competition within its niche is increasing.

We may not have reached peak gun, but we may have passed peak Smith & Wesson.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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