Innovations Like Bodyguard 20 May Boost Sales, But Market Softness Could Erode Margins

Key Takeaways

• Smith & Wesson's innovation and flexibility in manufacturing could drive market share growth, revenue boosts, and profit preservation in volatile conditions.
  
• Strategic capital allocation, including share buybacks and dividends, aims to enhance EPS and stabilize margins amid market challenges.
  
• Normalizing firearm demand, inflationary pressures, and increased competition may compress margins and reduce revenue, with lower future earnings expected.

Catalysts

Designs, manufactures, and sells firearms worldwide.

• Smith & Wesson's focus on innovation, as evidenced by new products like the Bodyguard 2.0 and lever-action rifles, is expected to drive market share growth and revenue increases.
  
• The company's flexible manufacturing model allows it to quickly adapt to market conditions, preserving profitability and potentially improving net margins even in volatile environments.
  
• Smith & Wesson's strategic capital allocation, including a $50 million share repurchase authorization and ongoing dividends, aims to enhance earnings per share (EPS) by reducing share count.
  
• The expansion of the company’s popular lever-action rifle line is anticipated to boost long gun sales and contribute positively to revenue as they enter new market segments such as hunting.
  
• Smith & Wesson's strong balance sheet and ability to navigate promotional pressures effectively might help stabilize or grow margins despite anticipated challenges in average selling prices (ASPs).

Smith & Wesson Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Smith & Wesson Brands's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.0% today to 5.0% in 3 years time.
• Analysts expect earnings to reach $26.1 million (and earnings per share of $0.6) by about December 2027, down from $36.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.2x on those 2027 earnings, up from 13.4x today. This future PE is greater than the current PE for the US Leisure industry at 17.0x.
• Analysts expect the number of shares outstanding to decline by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Smith & Wesson Brands Future Earnings Per Share Growth

Risks

• The normalization of overall demand for firearms and a significant decline in NICS during the quarter suggest market softness, which could negatively impact future revenue and earnings.
  
• The company noted inflationary pressures curbing consumer discretionary spending, influencing a trade-down effect to lower-priced products, which may compress margins and reduce profitability.
  
• Increased promotional activity due to competitive market dynamics is expected to sustain pressure on Average Selling Prices (ASPs), potentially reducing revenue and net margins.
  
• The company's handgun shipments significantly outperformed the market primarily due to new lower-priced products like the Bodyguard 2.0, resulting in an 11% decline in handgun ASPs, impacting revenue and earnings.
  
• The reduced revenue guidance for the upcoming year, with anticipated fiscal year revenue being 5% to 10% lower than fiscal 2024, signals potential lower earnings and market challenges.

Valuation

• The analysts have a consensus price target of $15.33 for Smith & Wesson Brands based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $13.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $524.9 million, earnings will come to $26.1 million, and it would be trading on a PE ratio of 31.2x, assuming you use a discount rate of 7.3%.
• Given the current share price of $10.99, the analyst's price target of $15.33 is 28.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.