It Is Time To Pull The Trigger On Smith & Wesson

Beating The Estimates, And The Outlook Is Good

Smith & Wesson (SWBI) just reported a blow-out quarter, literally, and has the stock positioned for longer-term gains. The company's name was recently changed from American Outdoor Brands to Smith & Wesson Brands is the same great firearms company it’s been since 1852. Today’s news, while superb, was not enough to spark a rally, however, and has the stock moving lower in early trading. The good news? If you’ve been waiting to pull the trigger on this stock, now is the time to start doing it.

Solid Results, Robust Outlook

It was no surprise that Smith & Wesson’s business improved this year. The pandemic sparked a round of buying that was only intensified by the violent protests earlier this month. What was a surprise is just how strong the results were, and how they are expected to play out this year and next.

On the top line, Smith & Wesson reported a 33% increase in YOY revenue for the fiscal 4th quarter/calendar 2nd beating consensus by over 600 basis points. The strength in sales carried through to the bottom line with EPS beating by $0.16 or 39% and that strength is expected to carry through into the end of the year. For the full year, revenue grew 6% and EPS is flat but, looking forward, the analysts expect both revenue and EPS growth to accelerate in 2020.

Notably, today’s results are for the fiscal 4th quarter, the outlook for growth in 2020 begins with the current quarter and that outlook is robust. Revenue growth should top 20% over the next 12 months and equate to over 110% of EPS growth. The only negative is that both revenue and EPS growth will slow in 2021 but to levels above those seen pre-pandemic. The two-year outlook for revenue and EPS growth is 15% and 42% showing a high-expectation among analysts for pandemic-driven trends to continue.

The Analysts Are Bullish But Take It With A Grain Of Salt

The analysts are bullish on Smith & Wesson but there is something you need to understand. There are only four analysts covering the stock and they are evenly split, 50% neutral and 50% bullish. Of those, only one is giving projections for future results so there is a lot of leeway in those figures. Typically, I like to see at least ten analysts in the mix to be sure consensus reflects a wide range of outcomes. The upshot is that the consensus target price reflects a 7% upside, the high target closer to 10%, and both would be new all-time highs.

What Smith & Wesson has going for it, if not the analyst’s support, is its valuation. Trading at 15X its forward earnings it is valued well below its peers. Gun-maker Sturm Ruger is trading at 19X its forward earnings while other sporting goods/outdoor stocks like Dicks are trading closer to 100X their forward earnings. Granted, Dicks is much more of a growth story than SWBI, and it pays a growing dividend, but there is room for a multiple-expansion for this stock.

The Technical Outlook: A Bull Flag Is In-Play

The technical outlook for this stock is very bullish, at least for now. The stock has been in a strong uptrend since hitting its post-pandemic bottom and recently, within the last three weeks, confirmed a major reversal in price action. Trading on June 1st, the day of the name-change, saw price action jump 25% to clear a key resistance point and spark a new updraft in prices. Since then the stock has continued to move higher and is now consolidating. To my eye, the consolidating looks like a bull-flag is forming and that means one thing; a continuation of the uptrend is in the offing.

Based on the magnitude of the rally from June 1st to today I put a near-term price target of $24 on this stock. That’s a gain of roughly 33% from today’s price action and likely only the tip of the iceberg. Longer-term, the rally off the March low to the $18.50 level suggests this stock could double or triple over the coming quarters. As wild as that sounds, both the monthly and weekly price charts show strongly bullish indicators convergent with the new highs and consistent with a move to retest the all-time high near $32.