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Smith & Wesson Holding Corp. (NASDAQ:SWHC) announced Q1 2014 earnings of $0.40 per share beating Zacks' average estimate of $0.36 per share. The company's guidance for Q2 is $0.20-$0.22 per share. The market has responded negatively to this guidance as it is well below the average estimates for the quarter. The company has estimated annual earnings of $1.30-$1.35. Below I will compare the potential impact of the stock repurchase program, when projecting quarterly 2014 earnings per share. The company has guided EPS estimates at 60.1M shares and has $84.3M available for stock repurchase. Shares now trade around $10.31, $0.69 below the tender offer of $11 per share.

Projected Quarterly Earnings Per Share

The company provided the above guidance during the Q1-2014 earnings call. Using the comments presented below on Production days per quarter, we can attempt to project Q3 & Q4 EPS.

Jeffrey D. Buchanan - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

'Specifically, production days in Q2 will be approximately 50. As a comparison, there were 63 production days in Q1, and we are planning for 57 days in Q3, and 63 days in Q4. We, therefore, expect that Q2 will be our lowest revenue and lowest gross margin quarter in fiscal '14.'

The Table below presents the projected earnings per share by quarter for fiscal 2014. This assumes the low guidance of $1.30 per share is realized.

The guidance for Q2 is (47.5%) down quarter over quarter. This is not an appealing comparison; however, based on the fiscal 2014 guidance, the prospects even brighten in Q3 and Q4.

Estimated Impact of Share Repurchase Program on Earnings Per Share

There were several pointed questions on the planned stock repurchases going forward. Below is some of the conversation from the earnings call:

Cai Von Rumohr - Cowen and Company, LLC, Research Division

'And then I think you said 60.3 million diluted shares in the second quarter, is that correct?'

Jeffrey D. Buchanan - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

'That's correct.'

Cai Von Rumohr - Cowen and Company, LLC, Research Division

'But I mean, you had 62 million, so to get there, you probably need to average 59 million shares -- basic shares out, and you have 62.7 million out of September. So basically, it looks to me like you're assuming you buy something like 6 million shares in this quarter in total, is that...'

Jeffrey D. Buchanan - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

'Well, we had an average of 65.6 million for -- at quarter 1 and we already, obviously, after that -- after the end of the quarter, we already have bought 1.8 million. And of course, we have an aggressive stock buyback plan in place. So I would expect that we get our recapitalization in order to buy back $100 million of shares and we plan on executing on that.'

The Table below projects additional buybacks, using the 62.7M share estimate, as of September.

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Considering that the company has sufficient funds to purchase greater than 10% of the current share base, I believe the potential impact is not sufficiently represented in the company's earnings projections. Assuming Smith & Wesson has been conservative in its estimates, given the uncertainty of the total number of shares to be purchased, we can attempt to project the EPS impact going forward.

The Tables below project the impact on earnings per share for Q3 and Q4, assuming a lower overall number of shares on the open market.

(Q3)

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(Q4)

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The Table below combines Q1 results, Q2 projections, with adjusted Q3 and Q4 estimates, assuming additional reduction of the share base. A fair share price is then derived using the current P/E multiple of 8.74. A share price of $10.31, as of market close, 9/6/2013, was used to find upside values.

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The Table below uses competitor Sturm, Ruger & Company's (NYSE:RGR) current P/E multiple of 11.44.

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The Table below uses an average P/E of 10.09 (RGR 11.44; SWHC 8.74).

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Conclusion

Smith & Wesson reported an earnings beat, while providing lower than expected Q2 guidance. The company's annual guidance points to better days in the second half of fiscal 2014. The stock repurchase program provides an additional catalyst for stock price appreciation. Based on the above estimate, it appears the post earnings selloff was an overreaction. A long investor may see 13%-53% upside, with a price range of $11.68 to $15.75 as fair value.

Source: Smith & Wesson: $84.3M For Stock Repurchase May Mean 13% To 53% Upside

Additional disclosure: I am not a financial advisor. This is meant for informational and comparison purposes only. The data and calculations are without guarantee.