Smith & Wesson: Is the Gun Run Done?

Our theme for Monday’s Goldman Guide was ‘Opportunity Knocks’. It is impossible to ignore the run that gun manufacturer Smith &Wesson Holding Corporation (NASDAQ – SWHC - $21.390) has had over the past week or so.

The stock has climbed nearly $3 since the inevitable and latest demonization of guns from the POTUS after the Paris and California terrorist attacks. The chart below illustrates the 800% climb the stock has had since Mr. Obama took office! No doubt he will be asked to be on the Board of Directors when he becomes a private citizen again in a little over a year.

SWHC7-Year Chart

(Source: www.otcmarkets.com)

We have featured SWHC in the Market Monitor and as a 30-30 pick over the last few years with the first highlight coming in April 2013 at $8.36. It has been a nice run for us with a 150% increase since that time. The question is, how long will this run last which has predominately fueled by political forces.

Yesterday, the Company reported 2QFY16 financial results and the news was positive for the most part. Revenue of $143.2 million and EPS of $0.22 beat estimates of $130 million and $0.18 respectively. Additionally, the Company raised expectations for FY 2016 to $630M from $610M, representing a 14% increase over FY 2015. This puts the forward P/E at 14 versus the trailing of 23. The revenue picture looks solid going forward.

If we step back and look at SWHC from a trading perspective the stock also looks promising. The short, intermediate, and long term EMA are all very bullish.

Finally, when margins are examined the signs also point in the right direction. The gross margin of 37% is 13% higher than the industry average while theoperating margin of 17% is also well above the industry average of 11%.

At the end of the day, the metrics indicate SWHC is a solid investment regardless of the political party in the White House. If the GOP gains control next year we doubt another 800% climb will occur in over a 7-year period. However, we still think SWHC is worth holding onto and believe the stock can climb to $25 in the first six months of 2016.

Have a great day!

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