Smith & Wesson Brands Inc (NASDAQ:SWBI) reported a fantastic fiscal 2nd quarter and it looks like these gains could stick. Based on the number of federal background checks and the number of 1st-time buyers the stage is set for solid gains across the entire firearms market. SWBI CEO Mark Smith noted background checks are up 57% year-to-date and at a record high. More importantly, the number of 1st-time buyers topped 8 million or more than 40% of all checks … and 25% of them have already upgraded to a more expensive model.
Smith & Wesson Blows The Consensus Away
Smith & Wesson produced not only a strong quarter but one that beat a relatively high expectation by double digits. The consensus estimate of $222.98 million is 20% higher than this same time last year with most of the increase over the last couple of months. The actual $248.73 million reported is more than 1100 basis points above the consensus and nearly 120% higher on a YOY basis. The revenue is due to a rising demand that helped the company leverage its costs and reduce inventory.
The gross margin for the quarter came in at 40.6% or 380 basis points better than expected. The margin gains carried through to the bottom line resulting in GAAP and adjusted earnings that are far above the consensus as well. On a GAAP basis, $0.87 in earnings beat by $0.21 while the adjusted EPS of $0.93 beat by $0.30. Looking forward, the spin-off of American Outdoor Brands (NASDAQ:SWBI) will have some impact on revenue but that should be priced into the stock by now. That aside, the company is in a great position to invest in growth and return capital to shareholders.
Deana McPherson, Executive Vice President, and Chief Financial Officer, commented, "Smith & Wesson's record-breaking financial performance enabled us to generate $49.1 million in net income, seed the outdoor products and accessories business with $25 million of cash at the spin date, repay the final $25 million on our revolving loan, and left us with $55.5 million of cash on hand, and zero bank debt, significantly sooner than our prior internal targets.
Smith & Wesson Brands Is A Deep Value And Safe Dividend
Smith & Wesson Brands presents a deep value trading at 5X this year’s and 10X next year’s earnings estimates. Not only has the company outperformed the consensus target by a wide margin this year, but the outlook for next year has yet to see any adjustment at all. Based on the Q2 results I expect to see the consensus for both years rise over the coming quarter and drive the share prices higher. The average analyst rating is bullish with a consensus price target near $22.40 or 40% upside from $16. The Wall Street high price target is $28.
The company just declared the calendar Q1 dividend in-line with the previous payment. The $0.05 quarterly distribution is worth about 1.25% and I see an opportunity for dividend-growth as well. The payout ratio is only 6.0% of earnings with ample free-cash-flow and no major debt. The stock goes ex-dividend on 12/16.
The Technical Outlook: Smith & Wesson Brands Is Ready To Reverse
Shares of SWBI have seen a little bit of volatility in the wake of the American Outdoor Brands spin-off but appear to have formed a bottom. Price action confirmed the bottom following the 2Q earnings release and looks like they are ready to move higher. The stochastic is confirming the bottom with a strong buy signal that is yet to be confirmed. The MACD is lagging the signal but set to confirm with upward price movement. The short-term moving average may provide resistance to higher prices but likely not. A move above that level would trigger a buy with exit targets at $18, $20, and $22
