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Smith & Wesson Holding Corporation (SWHC), a global provider of products and services for safety, security, protection, and sport, was recently upgraded to Outperform at Avondale with a $4.25 per share price target. At a 38.8% premium to the current market price, the analyst cited valuation as a primary catalyst for the upgrade and raised price target.

Key Highlights

  • Avondale upgraded Smith & Wesson to an Outperform with a $4.25 per share price target that reflects a 38.8% premium to the current market price.
  • Smith & Wesson’s financial performance has been negatively impacted by federal spending, but it has announced plans to sell or spin-off the unit.

Lackluster Financial Performance

Smith & Wesson has been trading lower than its peer group in recent months. For instance, its stock is trading down nearly 20% year-to-date, compared to Sturm, Ruger & Company’s (RGR), nearly 100% increase over the same time period. Of course, some of this discrepancy can be described by simply looking at the companies’ most recent earnings reports.

Last quarter, Smith & Wesson reported a 4.5% increase in revenues and net income of 1 cent per share, while Sturm, Ruger & Company’s (RGR) revenues jumped nearly 17% during the first half with net income of $0.57 per share. These higher growth rates justify higher multiples and therefore a greater valuation, as is reflected in the current market price.

Digging Deeper to Find True Value

But looking a bit deeper yields some key insights. The primary catalyst behind Smith & Wesson’s lackluster results was a 56.4% decline in its security solutions sales, which offset a solid 18% increase in its firearms sales. And earlier this month, the company announced plans to sell or spin-off the unit into a separate publicly traded entity in a move that could unlock significant value.

The company’s underlying fundamentals also appear to be improving. Earlier this month, it was awarded two firearm contracts in Texas from the Austin Police Department and the San Antonio Police Officers Association. Both organizations converted their firearms to the company’s products and could produce additional shareholder value down the road.

Source: Analysts Set Sights On Smith & Wesson