We have written about investing in guns before (link) but it is time to take a deeper look at Smith & Wesson (NASDAQ:SWHC). Right now the prices of semi-automatic AR's (ArmaLite rifle) are literally up 100%. We will be looking at how much exposure Smith & Wesson has to an increase in semi-automatic sales of AR style rifles.
Exposure to Semi-Automatic AR Rifles
Looking at the chart we can see that Smith & Wesson has 22.48% exposure to the semi-automatic AR market. Growth of the semi-automatic AR rifles segment is up 109.4% compared to last year.
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(Source: 12/06/12 10Q, Note: % Sales Weight was created by the author)
Demand for semi-automatic AR rifles is far outstripping supply. We can safely assume that the vast majority of retail AR weapons in the U.S. have been acquired. This is partly due to speculation -- if anyone can actually find one for sale they can flip it for a very handsome profit online.
Finding a semi-automatic AR style rifle at retail is extremely rare and even online many retail web sites are sold out or on allocated backorder. Smith & Wesson's website will redirect you to dealers to buy various semi-automatic AR style weapons, yet they are not in stock. Retailers are doing the best they can to restock but as soon as inventory arrives it is sold out in most cases.
Dennis Pratte, owner of My Gun Factory in Falls Church, VA talks about AR sales:
"They've sold out of just about every gun shop nationwide and just about every distributor is out of stock."
Gun manufacturers such as Smith & Wesson and Strum, Ruger & Co. (NYSE:RGR) are experiencing unprecedented sales of the AR line of rifles. This translates into higher revenues and profits, something all shareholders love.
Parts & Accessories
Parts & Accessories are a big part of any modern sporting rifle. Smith & Wesson derives 5.6% of its revenue from this segment. Revenue in this area is about to increase though -- because with an increase in AR sales comes additional parts and accessories sales.
American Rifleman points out:
The survey reveals that 84 percent of MSR (NYSE:AR) purchasers accessorize within 12 months: 22 percent at the time of purchase and 62 percent within a year.
While this is not a huge segment for Smith & Wesson it is a positive event for the company and must be noted.
Smith & Wesson obtains almost 54% of its revenue from pistol sales. With an increase in demand for concealed carry permits, additional pistol sales will occur. Typically people who want to pack a concealed carry pistol opt for a compact pistol rather than a full size due to the bulk of a full size pistol. This means they have to buy a compact style pistol and this will translate into additional pistol sales for Smith & Wesson.
WNEP of Pennsylvania reports:
People seeking license to carry permits in Columbia County more than doubled, up 112%. Lackawanna County saw a 65% rise. Applications are up 55% in Luzerne County, 49%-percent in Schuylkill and Lycoming Counties, and 39% percent in Monroe County.
In those six counties, (concealed carry permits went) from 1329 last December to 2031 this December, an overall increase of 53%.
Parts of Washington State have experienced a rise on concealed permit requests.
Concealed pistol license applications in Clark County quadrupled according to the Clark County Sheriff's civil department. On Dec. 14, "people were lined up out the door," said Nanci Collins, a sheriff's support specialist.
All of this bodes well for Smith & Wesson and the gun industry in general.
On December 6th Smith & Wesson announced a $20 million dollar share buyback. A mere few weeks later the buyback was completed and the company announced they were going to expand the buyback by $15 million dollars. While we love and prefer dividends, buybacks are also good as it improves the earnings per share.
Smith & Wesson is a buy. Aggressive share buy backs on top of a buying mania will translate to higher revenues and earnings for the company. The financials look good with a trailing P/E of just 10.07 and a forward P/E of 9.07. The PEG ratio stands at .27 while the profit margin is 11.16%.
(6 month chart via Yahoo.com Finance)
The risk the company faces is that if a gun ban went into effect, Smith & Wesson would lose a very productive product line and the stock would suffer in the short term. Some of this loss would be offset by a surge in pistol sales though due to fear of additional bans. To protect against a drop in share price an investor could buy put options to guard against a severe drop in share price. Buying a put allows you to sell your stock at a predetermined price to an investor. Of course you have to pay a premium for this option but it is worth considering.
We view Smith & Wesson as a strong buy. The share buy back and unprecedented sales of semi-automatic guns will result in an increase in revenue and earnings per share.
Disclosure: I am long SWHC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.