Smith & Wesson Drops After Cutting Forecast on Gun Demand

Gun enthusiasts aren’t as worried about the U.S. government as they once were, and that’s bad news for Smith & Wesson Holding Corp.

Shares of the second-largest publicly traded firearms maker tumbled the most in two years today after the company cut its forecasts amid a drop in sales of assault-style weapons, known as modern sporting rifles or “black rifles.” While enthusiasts had stockpiled guns after a 2012 Connecticut school massacre over fear of stricter federal laws, political support for an overhaul has waned.

“There was a bubble the last year to two years in gun buying and that was primarily in black rifles because that’s where the legislation was,” said Brian Ruttenbur, an analyst at Stamford, Connecticut-based CRT Capital Group LLC who has a buy rating on the shares.

Smith & Wesson cut its full-year sales and profit forecasts as unsold guns piled up at dealers, the Springfield, Massachusetts-based company said yesterday. The revision underscored the strains on the industry after top producer Sturm, Ruger & Co. missed analysts’ quarterly earnings and revenue estimates in July.

Smith & Wesson fell 13 percent to $11.38 at 10:42 a.m. in New York, after dropping to $11.36 in its biggest intraday decline since Aug. 15, 2012. Sturm Ruger decreased 3.4 percent to $49.29.

The shares of Smith & Wesson had slid 2.9 percent this year through yesterday, while Southport, Connecticut-based Sturm Ruger plunged 30 percent. That compares with gains of 31 percent and 14 percent in the same period a year earlier.

First-Quarter Results

Sales fell 23 percent to $131.9 million in the quarter ended July 31, Smith & Wesson said, missing the $134 million average analyst projection. Net income dropped 45 percent to $14.6 million, or 26 cents a share, beating the 25-cent average analyst estimate.

Falling sales of long guns, including modern sporting rifles, drove 87 percent of the revenue decline. The company said it saw strong demand for small, polymer pistols and revolvers.

“It’s been relatively steady in the handgun business,” Ruttenbur said.

Sales will be $530 million to $540 million in the fiscal year ending in April, the company said, backing off a previous forecast of $585 million to $600 million. Annual earnings will be 89 cents to 94 cents a share, instead of the $1.30 to $1.40 seen earlier.

Background Checks

Requests for criminal background checks for gun purchases, a gauge of interest in firearms, averaged 1.75 million a month in 2014 through July, according to U.S. Federal Bureau of Investigation data, down 3.8 percent from a year earlier.

Sluggish demand and the buildup of stock will have the biggest impact this year on the fiscal second quarter, Smith & Wesson said. For the current period, the company forecast sales of $100 million to $110 million and earnings of 4 cents to 8 cents a share, short of the average analyst projection of $137.3 million in sales and 28 cents a share in profit.

“It’s probably going to have one or two poor quarters as the channel works through all this inventory and then recover,” Ruttenbur said. “Their products are in high demand out there.”

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