It is extremely rare for a company to experience such an incredible surge in demand for its products that it is unable to produce enough units to keep pace. But that is exactly what is happening with Smith and Wesson (Nasdaq:SWHC) in the last few years.
Although the company continues to aggressively expand production capacities, Smith and Wesson’s fourth quarter results revealed that it is still unable to meet growing demand across most of its firearm products, fueling a surge in its backlog, sales and profitability
Those huge gains have been driven by a hotly contested political environment over American’s 2nd amendment right to bear arms. Rational or irrational, regardless of what side of the fence you are on, this is a political battle that is having a profound effect on gun sales and investments.
But with Smith and Wesson posting an eye-popping gain of 208% in the last 2 years, investors are scratching their heads trying to determine if shares are still a buy.
In terms of pure momentum, there are few companies that can hang with Smith and Wesson. The company’s fiscal 2013 report was filled with records.
Net sales for the full fiscal year were a record $587, an increase of 42.6% from last year. Firearm unit production for the year increased by 40.4%. Gross profit was 37.2% compared with 31.1% for fiscal 2012. Operating expenses were $85.6 million, or 14.6% of net sales, for fiscal 2013 compared with operating expenses of $83.1 million, or 20.2% of net sales, for fiscal 2012.
Smith and Wesson has been leveraging its explosive growth to strengthen its financial profile and reward shareholders. During fiscal 2013, the company repurchased 2.1 million shares of its common stock for $20.0 million with cash on hand.
In June the company announced a $100.0 million stock buyback that represents 17% of its current value, with a portion expected to be purchased through a $75.0 million tender offer for $10.00 per share.
Cash and equivalents as of April 30, 2013 totaled $100.5 million, up from $56.7 million a year ago.
Smith and Wesson is also using its financial strength to lower its cost to borrow money. In June the company repurchased its outstanding 9.5% notes for $49.2 million and issued $75.0 million of new 5.875% notes. Since then, the company has sold an additional $25.0 million of the 5.875% notes, which will bring the total new note issuance to $100.0 million.
But looking forward, its clear analysts believe Smith and Wesson has plenty of gas in its tank, calling for earnings growth of 9% in fiscal 2014 (current year) and 18% in fiscal 2015. In the next 5 years, analysts are calling for annual earnings growth of 30%, almost double the industry average of 17%.
Those bullish projection have been driven by surging estimates, with the fiscal 2014 estimate jumping 30% in the last 30 days to $1.32.
That has led to one of the most attractive aspects of Smith and Wesson, which is its incredibly undervalued share price. The company’s forward P/E ratio of 8X is less than half its 10-year average of 17 and well below its peer average of 13. That is a rare dose of value for a high-growth stock in favor with the market.
Smith and Wesson has seen huge gain in the last two years, with shares up an eye-popping 208%. But in spite of that bullish movement, analysts are still projecting impressive growth while the company continues to reward shareholders with big buybacks. And with a forward P/E that is far below it 10-year and peer average, Smith and Wesson still looks like a great buy.
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