Can you still carry Smith & Wesson (SWHC) in your portfolio and make money?
That's an important question after the stock surged as much as 10% just in the past five days, netting a new 52-week high. Investors have the company's strong third-quarter earnings report to thank.
Smith & Wesson has had plenty of obstacles, including stricter background check requirements for firearm purchasers, proposed by President Barack Obama.
The rise in mass shootings and school-relate incidents has prompted Obama to also called for smart gun technology -- a type of safety measure that uses fingerprint recognition and other biometric data to prevent anyone (other than the lawful gun owner) from firing the weapon. "If we can set it up so you can't unlock your phone unless you have the right fingerprint, why can't we do the same for guns?" said the president.
Smart-gun technology is something former president Bill Clinton also proposed. How will these issues affect Smith & Wesson? Smith & Wesson, one of the standard issuers of police firearms and those issued to the armed forces, voluntarily signed on to a president Clinton's smart-gun plan. The company created smart gun prototypes that were ready for production a decade ago.
But because of boycotts by the NRA, Smith & Wesson -- then perceived as giving in to political persuasion -- was nearly destroyed. Its revenue plummeted 40%, created a glut of used Smith & Wesson guns no one wanted at the time. The company had no choice but to sell itself to Saf-T-Hammer, an Arizona gun parts maker. Saf-T-Hammer came to terms with the NRA, mending the broken relationship later changing its name to Smith & Wesson Holdings. This occurred in 2004. So now the company doesn't operate with the same mindset, nor does it have mistake-prone management. Also, the company has repaired it's broken relationship with the NRA and has the support of its loyal customers.
Smith & Wesson just boosted its outlook for both the current quarter and fiscal year. These changes suggest the stock can surge 30% higher. Wall Street has had a hard time keeping up with the performance, fearing another decline. Last week's results marked the 12th consecutive quarter during which the company has beaten profit estimates, dating back more than three years.
Based on fiscal 2017 consensus estimates of $1.71 per share, which calls for just a 5% rise in earnings, it seems analysts are still underestimating Smith & Wesson's growth. For the current quarter, which ends in April, Smith & Wesson expects adjusted earnings per share to be in the range of 51 cents and 53 cents on revenue of $210 million to $215 million, which is higher than analysts' projections of 47 cents per share on revenue of $195 million.
This means even on the low end of its guidance, profits are projected to climb at almost 30% on 16% revenue growth.
Not only is the company's low-end range 18% higher than consensus, it represents a year-over-year increase of almost 90% above fiscal 2015 earnings of 90 cents per share. Smith & Wesson earned 90 cents per share for all of fiscal 2015. For fiscal 2016, the company has guided for a range of $1.68 to $1.70. This range is 90% above actual earnings in 2015 of 90 cents per share. Even with this guidance -- from the company itself -- analysts have yet to adjust their estimates for fiscal 2017, which they should have.
So, assuming Smith & Wesson meets this estimate ($1.71), it would represent just 5% growth above analyst forecasts for 2016, which is $1.63. That doesn't make sense to me as an investor. The stock is discounted, it has a consensus buy rating and excellent value at current levels.