Wednesday, 4 March 2015

Smith & Wesson: firing ahead

I have been an investor in the firearms manufacturer Smith & Wesson for the last few months (see my more recent report here) in the belief that a high inventory induced sell off in the shares would prove to be temporary.


As always with the market even though headline results showed an effective halving of operating income over both the last quarter and the last nine months...


For the Three Months Ended

For the Nine Months Ended


January 31, 2015

January 31, 2014

January 31, 2015

January 31, 2014


(In thousands, except per share data)
Net sales

$130,550

$145,881

$370,865

$456,195
Cost of sales

86,726

87,230

243,083

266,834
Gross profit

43,824

58,651

127,782

189,361
Operating expenses:








Research and development

1,901

1,456

4,830

4,119
Selling and marketing

10,088

8,921

26,884

24,150
General and administrative

16,136

17,154

43,765

53,184
Total operating expenses

28,125

27,531

75,479

81,453
Operating income

15,699

31,120

52,303

107,908

...forward guidance above market consensus drove the shares up over 8% in after hours activity. Reflecting again the importance of product and brand the company noted on the conference call that very importantly 'distributor inventory has declined...(believe) substantially below eight week threshold'.  This was exactly the market response I was looking for. 

Even though certain market trends such as poor long gun demand remain established this has been countered by the company's strength in pistols/concealed weapons which fit closer to the requirements of their customer base today.  No wonder they noted that 'our broad product offering remains popular...market leader'. I also note their fledgling accessories business (BTI) appears to be making good progress. 

In terms of the balance sheet the company noted the following structure on the conference call: 

$175m notes
$100m bank revolver access if required
near $60m cash

Looking forward they 'expect our cash balances to rise in Q4' (typically best seasonal period)...'probably end the quarter with around $90m of cash'. Which they could use to pay down revolver, call some of the notes in the summer or make inorganic acquisitions.  The important aspect is that they have flexibility.  With an EV given the above of prospectively just over US$900m and a recovering earnings profile I would place the company on a forward EV/ebit multiple (FY16e) of around x8s.  This feels still too strategically low.  There is still scope for a run at US$15+ share price again (c. x10 prospective EV/ebit valuation).  I am remaining long.



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