Wednesday, 9 December 2015

Smith & Wesson - keeping some bullets in the chamber

One of my best performing shares year-to-date has been Smith & Wesson.  Clearly a controversial share but based on brand, product range and consumer choices it has been immensely successful over recent years...and not just over the last year:

Three months ago (link here) I observed:

'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'

And so here we are:

So what to think here?  Well the numbers were very strong and EPS hopes were raised as noted on the conference call: 

Exceeding – ‘above the top end of our guidance range’

$SWHC Sees Yr Adj EPS $1.26-$1.31, Saw $1.14-$1.19, Est $1.20

‘increased fixed cost absorption’ due to higher volumes

And why was this?  The right products, adding accessories and strong growth of demand in terms of background checks: 

Polymer pistol good

Longarms revenues strong

Accessories went from zero to $18m+ revenues following BTI acquisition

Background checks up 4% reflecting good underlying demand

Why outperform?  Product, sales policies

‘strong distributor sell through’

Product development teams ‘continue to work hard’

1m M&P Shield gun produced

Noted next quarter has a number of gun shows

$54m cash despite $10m inventory build due to pre holiday season

75% of revenues handgun

‘highest single day in NICS history’ – Black Friday.  Up over 7% yoy and handgun +27%

And the future?  Further growth and potential buybacks: 

‘many exciting growth numbers in accessories’

Army contract award ‘no later than calendar 2017’

Bolt-ons?  ‘Would rather spend cash on ourselves’

‘more in favour of a stock buyback than a dividend at this stage…even more interested than a debt purchase…very low interest’

Sustained demand – ‘very difficult to tell…holiday period…wait and see’

At an EV of c. US$1.2bn the company trades on a barely double digit EV/ebit multiple.  Even for a controversial part of the marketplace this does not seem expensive, particularly when the company is generating cash too despite investing in product and trade shows.  I respected the US$20+ level by top-slicing my position but have retained a holding.  

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