Monday, April 21, 2014

Investing in Firearms Sales and Earnings Growth

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Stocks in the firearm industry were extremely hot in 2013 as worries over new laws spurred many to buy up guns and ammo before fresh regulations could come into effect. However, any big changes to nationwide gun legislation haven’t really taken place, cooling demand for many firearms across the country.

Yet even with the lack of legislative impetus, many stocks in the firearm industry remain well-positioned for further gains, and are actually looking quite promising for 2014 as well. This is particularly true when investors take a closer look at one of the most famous names in the industry, Smith & Wesson (SWHC - Trend Report).

SWHC in Focus

The Springfield, Massachusetts-based arms maker is probably best known for its pistols and revolvers, but the firm is also involved in a variety of rifles and firearm-related products as well. The company is over 150 years old, and it has stood the test of time selling its defense products to individuals, police, military and federal workers.

While the fear of increased gun legislation has certainly boosted volatility in SWHC over the past few years, the stock has moved significantly higher regardless of these worries, and even as these concerns have cooled in recent months, SWHC has remained a top performer. In fact, the stock has added over 80% in the past two years, while it is sporting a 27% gain in the past six months compared to a roughly 7.5% move higher for the S&P 500 in the same time frame.

However, it is worth noting that SWHC was on a bit of a bearish trend in 2014, at least during the first two months of the year when the stock lost about 15% of its value in the time frame as worries built that the gun boom was beginning to fade. The company put these concerns in the rear view mirror though, as its earnings report on March 4th crushed estimates while the firm raised guidance as well.

Recent Earnings

For the most recent quarter, our Zacks Consensus Estimate for SWHC earnings was 29 cents per share, but Smith & Wesson posted EPS of 35 cents a share, crushing the estimate by over 20%. This also continued the solid streak of beats for the company, as it has now beat in each of the last four quarters including an average beat of 16.9%.

Beyond this solid beat on the earnings front, SWHC also boosted its guidance up to $1.39-$1.42 a share for the full year. Thanks to this great earnings report and the move higher in guidance, it shouldn’t be much a surprise to note that many analysts bought in to this continued upswing in shares of Smith & Wesson, leading to several earnings estimate revisions higher.

Earnings Estimates

In the past two months, six estimates for SWHC have moved higher, and not a single one has gone lower in the same time period. The current consensus has now moved up to $1.43/share—just ahead of management guidance—baking in a very solid EPS growth rate of just under 17% for the company.

Clearly, even as the gun market cools off, SWHC remains well-positioned for further gains, and a solid level of growth as well. Due to this, the company has earned itself a Zacks Rank #1 (Strong Buy) meaning that we are looking for more outperformance from the company in the weeks ahead as well.

Bottom Line

SWHC has been a very solid stock over the past two years, but it ran into some turbulence to start 2014 as many were worried that the gun boom was fading. However, the firm surprised with a very solid report and increased guidance, dispelling those worries with ease.

Given how bullish analysts have been on the company following this report—and SWHC’s track record at earnings—there is plenty of reason to believe that more gains are ahead for this company. So before you think that you missed out on the gun stock boom, take a closer look at SWHC, the stock remains well-positioned for growth and it could still have plenty of room left to run if recent earnings estimate revisions are any guide.

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