An Iconic American (Gun) Company With Compelling Upside

By: SumZero Staff | Published: December 05, 2013 | Be the First to Comment

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Smith & Wesson Holding Corporation (SWHC) manufactures firearms. It manufactures an array of handguns, modern sporting rifles, hunting rifles, black powder firearms, handcuffs, and firearm-related products and accessories.
Solid Brand 
SWHC is an iconic brand (92% brand awareness) with a 160+ year history. 
For most consumers, "revolver" and Smith & Wesson are synonymous. 
Revenue sources are from both the consumer market (sporting goods, hunting, and personal protection) and professional market (law enforcement, government and military). The company continues to increase market share in handguns and brand awareness.

Diversified Revenue Streams 
Strong handgun sales, specifically pistols, fuel SWHC's robust growth. SWHC's handgun division increased revenues by more than 35% compared to 2012 results. This bodes well for a company with 55% of its sales coming from handguns (nearly $325 million). The company has a 17% market share of the $2 billion handgun market. SWHC is similarly well positioned in the long gun market with revenues of nearly $180 million in 2013. This represents a 6.7% market share ($2.1 billion market). The company grew segment revenues by 75% year over year. Pistols are more than 85% of handguns sold. They offer advantages of comfort, easier trigger pull, and more safety features than revolvers. SWHC's focus on this trend is to grow their M&P pistol market share, which compares favorably with the Glock (Austria) and the XD (Croatia).

Quarterly Earnings 
SWHC announced strong quarterly earnings for Q1 of fiscal 2014. Quarterly sales rose 25% (compared to Q1 2012) while annual revenue grew more than 40% (year-over-year). Both gross margins and profit margins increased (relative to 2012 results) as the company operated more efficiently by reducing costs. The company has backlog in excess of $875 million, which indicates strong demand for SWHC's products. These purchase orders will help the company continue its strong revenue growth going forward. Strong Financials 
SWHC has generated greater than $135 million in operating cash flow over the past 2 years. The company has more than $140 million in total cash on its balance sheet with no short-term debt.

The new capital structure has further strengthened the company's financials:
--Bond Issuance 
Issued $100 million senior notes (due 2017) at 5.875% and used 50% of the proceeds to repurchase outstanding 9.5% senior notes. The remaining proceeds were reserved for stock buy backs.
--Share buybacks 
SWHC recently completed a $100 million buyback during the period of June-October 2013. In June 2013 they made a tender offer at $11 per share and bought back 1.4 million share ($15.6 million). In the period of August through September they purchased $84.4 million shares in the open market. And on October 1, 2013, they authorized an additional $15 million buy back.
--New line of credit 
In August 2013, completed a new line of credit (unsecured) for $75 million, expandable to $175 million.

At the current valuation, SWHC is a iconic American brand, with a strong balance sheet that is currently trading at a P/E (ttm) of 9.

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