Investors Unload on Smith & Wesson

The shares plummeted Tuesday after the firearms maker said a weak hunting season would hurt second-quarter profits
Smith & Wesson will not hit earnings or sales targets this quarter. Shares fell 37% on Oct. 30. Bloomberg News

Smith & Wesson (SWHC) missed its sales target this hunting season, shocking investors who had fallen in love with the company's turnaround story.

The stock tumbled 40% on Oct. 30 after news that this quarter would not meet the firearms maker's earnings or sales predictions. The preliminary results suggested Smith & Wesson's much-praised growth strategy is hitting serious roadblocks. Some analysts, however, said Smith & Wesson was just hitting some temporary turbulence, making this an opportune time to buy up a stock with great potential.

Revenue in the second quarter, which ends Oct. 31, is expected to grow 36 to 40% from a year ago to a range of $69 to $70 million. But that's actually a drop from the previous quarter's sales.

"Among the factors were softness in the market for hunting rifles and shotguns, driven by lower than expected consumer demand," president and chief executive Michael Golden said in a statement. Other culprits were too much inventory at retail stores and "unseasonably warm autumn weather, which decreased retail traffic and compressed the fall hunting season."

The firearm makers' stock is trading at 12 times its price just three years ago, a run-up that's the result of an array of new strategies. Smith & Wesson expanded beyond its handgun business with new products and acquisitions aimed at hunting rifles, shotguns, tactical rifles and the winning of military and police contracts.

"I truly think this is a short-term event for the next couple quarters," says Eric Wold, an analyst at Merriman Curhan Ford. Customers still want to buy Smith & Wesson products, but retailers and distributors are swamped with too much of their competitors' inventory after a slow hunting season, Wold says. "They're getting punished for problems at their competitors."

Amit Dayal, an analyst at Rodman & Renshaw (RODM), is far less optimistic, suggesting the slow sales raise troubling issues.

First, Dayal says, Smith & Wesson is being hit by a slowdown in consumer spending across the board. High oil prices or a weaker economy could be causing hunters to hold off on new gun purchases for a little while. Firearm enthusiasts also are being hit by a 30 to 40% increase in the cost of ammunition over the last year, Dayal notes.

Second, the firearm industry is often cyclical — growing fast for a few years and then slowing down for a few years. Times have been good for gun makers, but "it looks like sales are starting to plateau across the board," Dayal says.

Smith & Wesson's boosters say the company was never dependent on big growth in firearm sales. Rather, its strategy is to take market share from competitors with new, superior products. Smith & Wesson can claim, for example, that its new pistol is winning 80% of new police contracts, and is well-positioned to win a big military contract in the next couple years.

However, Dayal says Smith & Wesson's competitors are catching on. "They're coming out with new products of their own," he says.

A big unknown is whether Smith & Wesson can win big military contracts in 2008 or 2009. That would help the company insulate itself from the ups and downs of the consumer market.

No one is suggesting that Smith & Wesson is in serious trouble. The main debate among analysts is whether sales can grow 30% per year or a more modest 10 to 15% in the next couple years.

Smith & Wesson shares ended the trading day at $12.12 per share, off 40% from Oct. 29's closing price of $20.09.

Smith & Wesson's stock may recover in the long-term, especially if it can win more military contracts. But, for the short term, all signs point to a classic case of investors' expectations getting way ahead of actual results.

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