Friday, 28 August 2015

Smith & Wesson: raising numbers

Back in June I noted about the firearm designer and manufacturer Smith & Wesson:

'Free cash flow for their FY15 equated to around 10% of market cap and net debt is modest as one of the revolver debt deals remains untapped.  From my perspective for FY16 the company trades on a high single digit EV/ebit multiple which just feels too low to me - especially in an environment where key broader industry competitors like Colt are in deep restructuring problems.

So a conclusion: I am keeping hold of my Smith & Wesson shares and I can see them hitting US$20/share over the next year.  A break below a US$15/share price should be viewed as an opportunity to augment given industry and company specific fundamentals'.

Since then the stock has resolutely traded in a US$15-17 range despite the recent market volatility.

Yesterday's (Thursday's US after hours) results contained some striking headlines including: 

'Our first quarter results exceeded our expectations for sales and net income in both our firearms and accessories divisions.  Higher  revenue in our firearms division was driven by strong orders for our M&P®15 Sport™ rifles, our Thompson/Center Venture™ bolt-action rifles and our M&P Shield™ polymer pistols...Based upon our performance for the first quarter and our current outlook for the remainder of fiscal 2016, we are raising our full year revenue and net income guidance'

So strong product performance leading to enhanced guidance...and strong metrics too with a 16% rise in operating profitability year-on-year for the first quarter and a switch to positive free cash flow generation.  Extrapolating the numbers puts the share on a single digit EV/ebit multiple and a 4%+ free cash flow yield despite the company noting '...our seasonal inventory build as we prepare for the upcoming fall hunting and holiday shopping seasons'.

And the materiality of the enhanced guidance?

'It raised guidance for full-year revenues to $610M-$620M (vs. an expected $612.7M), and for non-GAAP EPS of $1.14-$1.19, vs. an expected $1.07. For Q2, it's guiding to revenues of $135M-$140M (vs. expected $130.3M) and EPS of $0.19-$0.21 (high of a consensus $0.14)'

That's a pretty good enhancement...with the company noting additional help from the accessories business even if some of the seasonals get harder in their Q2 (the current quarter). Additionally they felt that general inventory levels in the marketplace continued to improve as the sector's fundamentals got better.  This is good news as it reduces the risk of extreme competitor action 'dumping' excessive inventory.  They also noted the high continuing levels of NICS firearm background checks ('a pleasant surprise') which should be some sort of indicator re demand.  

With a balance sheet of 'no borrowings on our $175.0 million revolving line of credit', the company were a little coy about the potential for future buybacks although clearly it should be on the agenda by the end of the current financial year (especially given the company has historically not been coy about applying buy backs).  

Other highlights from the conference call included:

Wal-Mart - further restricting sales is not a market insight as 'many retailers are in and out of the market'

General market - 'got a lot of research showing more and more people are showing an interest in shooting as a sport

Products in development - 120 including many in the accessories but generally 'a healthy increase over last year'  

Promotional activities - 'ongoing as want to take market share' 

Army contract - 'well positioned' but no further news on this tender at the moment.  

Overall I talked about the scope for a run on a good day at US$20 a share back in June and unsurprisingly I still see this now.  In short a company that may divide people in terms of their underlying product but one which - currently - is performing well.  For me - as a current shareholder - still a strong hold.  

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