On Tuesday, shares of Smith & Wesson (SWHC) shot up more than 16.4% on relatively heavy Nasdaq trading.
As a result, the company has given all of its forecasts and expected earnings a boost.
But aside from Smith & Wesson’s most recent good news, other less-than-pleasing variables play a huge role in the firearm manufacturer’s future.
All considered, I wonder if the company is really firing to new heights, or is it merely shooting blanks?
Surveying the Whole Landscape
Let’s take a look at the facts… The Springfield, Massachusetts-based firearms manufacturer closed on Tuesday at $11.67, up more than $1.65 from Friday’s close with more than 9.2 million shares trading hands. Compare this to a typical volume of about 1.1 million shares changing ownership.
The chart below illustrates the move higher from Friday’s close.
The sudden spike on Tuesday was prompted by news that the company issued an upbeat outlook for its third-quarter and fiscal 2015 earnings.
In the company’s release, SWHC announced that it expects to report third-quarter earnings from continuing operations in the range of $0.15 to $0.16 per share, which is a $0.10 jump from its previous projection.
Feeling even more ambitious, the company also raised its full-year 2015 earnings from a $0.66- to $0.70-per-share range to a cool $0.74 to $0.78.
The news has left Wall Street wondering if the earnings upgrade is a shot across the bow of higher share prices, or if it’s nothing more than smoke and mirrors.
After all, it was just last August that Smith & Wesson announced a 45% decline in sales due to shrinking demand for its products – especially long rifles.
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A week later, we learned that gun dealers had significantly overstocked their shelves all year, resulting in lower future sales for SWHC and Sturm, Ruger & Co. (RGR).
Now, while the news may have been good for shareholders, I think there’s little evidence to suggest that investors should pull the trigger on this stock.
In the company’s Q3 FY 2015 filing, it reported a total revenue of $108.4 million, a decline of 22.1% over the $139.2 million reported in the same quarter a year ago.
And as you might expect with a decline in total revenue, the bottom line suffered from the revenue weakness as EPS declined from $0.28 to $0.09 – a whopping 67.8% drop.
Adding more insult to injury, the company suffered a large decline in net operating cash flow, as well, falling to -$14.21 million, or by 385.76%, when compared to the same quarter last year.
Lastly, the company saw its net income fall from $16.9 million in Q3 FY 2014 to $5.05 million in its last full quarter – a 70.1% decline.
Hold Your Fire
Don’t get me wrong: It isn’t all bad for the firearms manufacturers…
FBI background checks, which are the most reliable measure of gun sales, climbed to 2.3 million in December – a 27.7% increase over November’s number.
But, of course, the numbers were influenced by holiday sales of firearms, and the increase on its own isn’t reason enough to own this stock.
Frankly, there’s still too much inventory being held at retail gun outlets.
To avoid a misfire, dodge SWHC stock until the current inventory at gun retailers shrinks.