Smith & Wesson Takes a Shot at 21st-Century Success

Jun. 7.07 | About: Smith & (SWHC)

In 1852, Horace Smith, who honed his skills in the firearms trade while working at the National Armory, and Daniel B. Wesson, a former apprentice to his brother, Edwin Wesson, the leading maker of target pistols and rifles during the 1840s, formed a partnership to market a lever action repeating pistol (to replace the cumbersome muzzle-loaded rifle). After struggling as a fledgling business, the company's products eventually gained prominence. The rest is, as they say, "history."

Springfield, Mass.-based Smith & Wesson Holding Corporation (NASDAQ:SWHC), parent company of Smith & Wesson Corp., built its reputation on producing high-quality, high-performance precision handguns. The legendary arms maker has equipped soldiers from the Civil War to Vietnam and the vast majority of American police forces. (Smith & Wesson's .357 Magnum was developed specifically for law enforcement agencies, and the world-famous .38 Special has, at one time or another, been the sidearm of choice for hundreds of police forces around the world.) Known for merging age-old craftsmanship and state-of-the-art technology, Smith & Wesson produces some of the world's most coveted weapons. (It helps that their .44 Magnum was carried by Clint Eastwood's Dirty Harry character.)

Smith & Wesson dominated the handgun business in the consumer, law-enforcement and military markets for almost a century. But by the early 1980s, Smith & Wesson's market share with U.S. police departments dropped to 10% from 98% two decades earlier, as these law enforcement agencies transitioned from issuing revolvers to semi-automatic weapons. This gave the advantage to such high-profile competitors as Italy's Beretta, Austria's Glock and American rival Sig Sauer. By the end of fiscal 2002, Smith & Wesson had a net operating loss of over $5 million.

Under the leadership of current chief executive Michael F. Golden, who joined the firm in November 2004 and quickly implemented a turnaround plan and branding initiative, it has increasingly moved away from handgun production only into the manufacture of rifles, shotguns, ammunition, and lifestyle products, as well as a range of rugged outdoor wear and accessories. When Golden signed on with the company, he had never even fired a gun. But he had been a key player in the expansion of the hugely successful DeWalt power tool line at Black & Decker Corp. (BDK) and had overseen sales and marketing of bathroom fixtures for Kohler. Golden brought together outside talent to beef up Smith & Wesson's management team: executives with sales, marketing and merchandising expertise at Coca-Cola Co.(NYSE:KO), Frito-Lay (NYSE:PEP), Harley-Davidson Inc. (NYSE:HOG) and competitor Beretta, and sales staff with extensive experience in the law-enforcement and military markets.

All indications are the company's brand extension efforts are paying off. In 2005, it secured its first U.S. military contracts in more than 15 years and in 2006 it was awarded a $20 million contract to supply Afghanistan's national army with 9mm pistols. After introducing a new lightweight high-strength plastic pistol designed for the police and military markets, Smith & Wesson has finally regained some market share. As a result, Smith & Wesson's firearms sales, which were once in decline, have increased by over 40% in each of the last four quarters. On the mergers-and-acquisitions front, in January 2007 it absorbed Thompson/Center Arms, a leading rifles manufacturer. The $70 million buyout will allow Smith & Wesson to tap into the $1.1 billion annual market for long guns—predominantly hunting rifles—almost twice the size of the retail handgun market. The U.S. military, whose leadership is pushing for American troops to carry domestically-manufactured weapons, is planning to shift from 9mm to .45 caliber handguns, a size dominated by Smith & Wesson. The Defense Department's contract with Beretta expires this year, and Smith & Wesson is aggressively competing for the business. It goes without saying that winning the contract, which has the potential to be worth up to $600 million, would have a significant impact on the company's bottom line. And with the war on terrorism and border security on everyone's mind, the company's legacy of quality American-made products dating back to the pre-Civil War era may give it a competitive advantage over other bidders.

While the $2 billion-a-year gun industry is experiencing sluggish sales largely due to hunters becoming an aging demographic, Smith & Wesson has positioned itself to take advantage of a shifting pro-gun political climate in Washington and in statehouses across the country. A slick marketing campaign has put the Smith & Wesson’s name on everything from cable TV shows to Nascar racers. And this year, it launched a magazine print ad, which has appeared in various outdoor magazines, targeting novices to the world of weaponry.

Barely profitable when Golden took over, Smith & Wesson has seen revenues soar 27%, to $160 million in 2006. Profits rose 66%, to $9 million, licensing revenue climbed 17%, and the stock has more than doubled in the past year. Company executives are projecting sales gains of 40% or more for fiscal 2007 and 2008. Wall Street analysts estimate that earnings will rise as much as 60% this year. Smith & Wesson's stock has shown its firepower, shooting up from just over $6.77 a share a year ago to about $14.00 recently. Analysts put a 12-month target of $18.50 on the stock. With a new direction and lots of potential growth in the security, self-defense, sport shooting and virtually untapped Gen Y markets, this micro-cap has been hitting targets like a sharpshooter. Smith & Wesson, it seems, has reawakened, and investors are taking notice. It may be time for you to put the old gunslinger in your cross hairs.

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