NEW YORK (TheStreet) -- Smith & Wesson (SWHC) shares shot higher in after-hours and morning trading as investors loaded up on the gun maker when it reported a larger caliber than anticipated in revenue, earnings and guidance during its fiscal third quarter ending January.
Smith & Wesson reported adjusted earnings of 35 cents per share, 6 cents above Capital IQ Consensus Estimate of 29 cents. Revenue jumped 7.1% year-over-year to $145.9 million, $3.6 million above the $142.3 million estimate.
The reported 30% surge in handgun revenue was especially surprising considering Sturm, Ruger (RGR) CEO Michael Fifer's recent conference call comment warning shareholders that 2014 sales are coming down to more "realistic" levels after surging in 2013. Cabela's (CAB) also reported soft gun and ammo sales a couple of weeks ago, lowering expectations.
Smith & Wesson's gross margins continue to expand and reached 40.2% of net sales, 3.6% above the 36.6% gross margin in the comparable quarter 2013. Gross profit was $58.7 million, $8.8 million above its year-ago quarter of $49.9 million.
Operating expenses were $27.5 million (18.9%) compared to $21.9 million (16.1%) during the comparable quarter last year. Operating margin improved modestly to 21.3% compared to 20.6% in the prior year. Net income was $20.1 million a 34.6% increase year-over-year.
Smith & Wesson's highly popular M&P series pistols expanded its market share and contributed significantly to revenue. CEO James Debney said in the conference call that channel inventory remains low for M&P Shield, M&P 15 sport rifles, SDVE polymer pistols, 1911 model and revolvers.
Looking ahead at future sales, the company expects revenue in the fiscal fourth quarter ending in April will be between $159 million and $164 million. Diluted earnings per share is expected to fall into a range of 37 to 40 cents. For the full year, fiscal 2014 Smith & Wesson anticipates revenue of $615 million to $620 million and diluted earnings per share between $1.39 and $1.42.
The company ended the quarter with $45.3 million in cash, and its credit line remains untapped. Share buybacks reached a limit due to senior note restrictions on stock purchases. Purchases totaled $135 million to buy back 12.2 million shares at an average buyback price of about $11 a share. As a result of buybacks, the trading float was reduced by 19%.
The float is especially relevant to short sellers. A small and shrinking float can result in misery for shorts caught in a bear trap. Short sellers began walking away, albeit over 30% of shares traded are shorted. After reporting the last quarter's blow out numbers and fantastic guidance, the super-sized short interest may turn this stock into a short seller widow maker faster than Wyatt Earp can skin a pistol. Wednesday and Thursday will likely be bloody for shorts.
On the other hand, this should be an exceptionally pleasing week for shareholders. I joined in on the party during after-hours on Tuesday. The entry started as a quick hit-and-run trade, but as I examined the numbers further, I decided to hold for greater potential rewards.
At the time of publication, Weinstein is long SWHC
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.