Lean, Mean Smith & Wesson Brands Falls On Revenue Miss
Smith&Wesson Brands(NASDAQ: SWBI) has been actively repositioning itself as a pureplay on firearms for the last 18 months or so. Those efforts are seen in the spin-off of American Outdoor Brands and internal efforts to control costs, and in the quarterly results. The company’s efforts, coupled with strong demand, have led to a stunning five consecutive quarters of revenue growth in the core, continuing operations segment, widening margins, and increasing profitability.
Mark Smith, President, and Chief Executive Officer commented, "Our flexible manufacturing model and strong consumer preference for our products at the retail counter combined to deliver the highest first-quarter net revenue in the company's history, marking the fifth consecutive quarter of top-line records. Even more remarkable, our team has been able to deliver nearly 170% two-year compounded growth, significantly outpacing the competition, while simultaneously lowering operating costs over this same timeframe.”
Record-Setting Results For Smith & Wesson Brands
Smith&Wesson Brands’ fiscal Q1 results are strong in many ways. Not only are the post-spin-off results about to overtake the pre-spin-off results but the company posted record revenue for continuing operations. The net is $274.61 million and up 19.5% over last year with only one thing to mar the results. The analysts were expecting another 150 basis points of growth so the results count as a miss despite their strengths and strong they are. The revenue is up 170% in the two-year stack proving the strategy is working.
Margins lend further evidence the strategy is working. The company’s gross margin is up 710 basis points to 47.3% which helped drive strong gains in both GAAP and adjusted earnings. The GAAP EPS is more than double the previous year at $1.56 and it beat the consensus by $0.36 and has the company on track to beat the consensus estimates for the next quarter and the full year. The first-quarter results are more than 25% of the full-year consensus for both revenue and earrings with the strongest fiscal quarters of the year still to come.
Pull The Trigger On Smith&Wesson’s Dividend
Smith&Wesson doesn’t pay a large dividend in terms of its yield but it is very safe by Wall Street standards and comes with a high expectation for distribution growth. The payout is running about 0.90% of share prices and only 5% of earnings leaving ample room in the cash flow in theory if nothing else. Turning to the balance sheet, the company is sitting on a fortress balance sheet so there is little impediment to cash flow or the company’s ability to pay the distribution at the current or greater rate. The history only shows four quarters of payments but with a 60% from the 3rd to the 4th payment. Based on the outlook for revenue and earnings, the balance sheet, and the free cash flow we will not be surprised to see another substantially large increase within the next few quarters.
The Technical Outlook: Smith&Wesson Pulls Back To Support
Shares of Smith&Wesson are down nearly 10% in the wake of what we view as a very good report. The problem for the market is the fact revenue fell short of consensus and there is a high short interest as well. The takeaway is that, at these levels, the company is only trading about 5X its earnings which is a ridiculously low valuation for any stock. In that light, we expect to see support and short-covering keep price action above the $22.50 level with a chance for a rebound later in the year. The consensus price target reported by Pricetargets.com is $30 or about 30% above current price action and edging higher in the wake of the earnings report.
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