Smith & Wesson Holding Corp (NASDAQ:SWHC)

lvbobmvhp (85.52) Submitted: 8/2/2007 6:39:28 PM : Start Price: $16.31 SWHC Score: -49.53

Lots of Fight Left in Smith & Wesson
By Jack Hough
July 25, 2007

"SMITH & WESSON HAS far more fame than it has sales or size," this column noted in October 2005. Nearly nine in 10 Americans recognize the 155-year-old firearm brand, but trailing 12-month sales at the time were a piddly $126 million. We pointed out that the company had plans to expand its brand beyond handguns to rifles, shotguns and merchandise, and that its bosses were loading up on shares. Sales have since soared. They're on pace to reach $333 million this fiscal year ending April 30, 2008, and $400 million next year. Shares since our story have jumped to $17 and change from less than $5.

The stock still looks like a bargain. It turned up recently on our Small Cap Growth screen, which looks for companies worth less than $1 billion that are posting rapid gains in sales, profits and share price. Among such companies, those with ambitious price/earnings ratios are sometimes worth paying up for. Smith & Wesson, for example, trades at 28 times this fiscal year's earnings forecast, a 55% premium to the S&P 500 index's median P/E. But the company is expected to boost its earnings by an average of 22.5% a year over the next five years, more than double the rate projected for the index. Together, those numbers make the stock look considerably cheaper than the broad market.

Springfield, Mass.-based Smith & Wesson is already the U.S. sales leader in revolvers and No. 3 in pistols (pistols have a fixed firing chamber, while revolvers use a rotating cylinder of chambers). And the company is still taking share; its pistol sales jumped 60% last year. In March 2006 Smith & Wesson launched "tactical," or military-style, rifles and last month it began selling shotguns. Hunting rifles are next, thanks in part to the company's recent purchase of Rochester, N.H.-based Thomson/Center arms. Initial response to the new products has been promising. The company captured a quick 11% of the tactical rifle market. Analysts say the new products are transforming Smith & Wesson into a military and police supplier rather than just a consumer gun maker.

"Given that Smith & Wesson is likely the only domestic gun manufacturer with the capacity to fulfill the anticipated demand, we believe it has an increasing chance of winning part or all of the potential $350-600 million in military orders that could materialize in the next 12-18 months," wrote Eric Wold, an analyst with San Francisco investment bank Merriman Curhan Ford, in a June 15 research note. In anticipation of the U.S. military shifting from 9-millimeter pistols to .45 caliber ones (both numbers are barrel diameters; the latter is in inches and equals about 11.4 mm), Smith & Wesson began making .45 caliber military-style pistols in January.

Cops are buying, too. Smith & Wesson used to dominate the law-enforcement market, but today controls just 10% of it. Last fiscal year, though, law-enforcement sales jumped 126%. The company says 80% of the departments it targeted have placed orders for new products. More than 200 departments have committed to using its new military/police handguns, while 150 are testing them.

Wold calls the stock a Buy and points out that fiscal 2008 sales targets might be conservative. More than 40% of sales projected for the first half were already recorded as backlog by April 30, the end of fiscal 2007. There are also licensing deals in the works for safes, gun-cleaning products, hats and, through a recently announced deal with Wilson's Suede and Leather, jackets, belts, wallets and more. All told, the shares look cheap and the opportunities for new sales seem plentiful. Expect Smith & Wesson to keep paying off nicely for stockholders.