Wednesday, 15 April 2015

Smith & Wesson: straight shooting (and should you sell the big bounce?)

It was only back in early March (link here) that I wrote up after the publication of their fiscal Q3 corporate results that the gunmaker Smith & Wesson was well-positioned:

'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'.

Despite remaining long even I did not anticipate today's excellent announcement:

'...updating expectations for its fourth quarter and full 2015 fiscal year, which will end April 30, 2015. The company indicated that orders throughout its fiscal fourth quarter have been stronger than originally anticipated and it is therefore increasing its guidance'.

And the extent of the upgrade? 

 now sees revs at $546-555M vs prior guidance of $532-536.

So 3.5% better sales.  Add in some operational leverage and numbers are going to have to be hiked by 5%+.  I doubt if that US$15 level I talked about above - and at which the shares are now trading - will be a double digit prospective EV/ebit multiple anymore.

Looking at the chart over the last year two aspects are immediately apparent.  First the US$15+ share price level has been pretty rarified air in absolute terms...


...and second Smith & Wesson shares have been somewhat volatile.  Now the reason for this can be 
shown in a pre-update revenue chart from last month: 

The company had struggled to match its fiscal FY14A sales and even today's upgrade will not allow it to do this...but at least it should show some growth on fiscal FY13A sales and - as discussed at the link above - the fundamentals still remain solid in terms of building demand and a very strong product range:

 So what to do?  Despite the upward violence of today's move my instinct is to wait.  The key is the FY16e guidance which should be forthcoming the next time the company reports (19 June).  Today's update bodes well for this.  My instinct is that we may trouble the June 2014 high before the year is out.

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