New Firearms Like Bodyguard 20 May Strengthen Market Position, Yet Shrinking Margins Pose Risks

Key Takeaways

• Product innovation and market share gains in new categories are expected to drive future revenue growth.
  
• Effective inventory management and strategic reinvestment may enhance cash flows and profitability.
  
• Decreased demand and lower margins, influenced by economic pressures and competition, threaten Smith & Wesson's revenue stability and shareholder value.

Catalysts

Designs, manufactures, and sells firearms worldwide.

• The introduction of new products, such as the Bodyguard 2.0 and lever-action rifles, which have gained market share in their respective categories, is expected to drive future revenue growth.
  
• Continued strong performance and anticipated introductions in FY '25 and beyond highlight the focus on innovation, likely impacting revenue positively as new products are brought to market.
  
• The company's flexible manufacturing model should help maintain profitability across varying demand conditions, potentially improving net margins through cost management efficiencies.
  
• Internal and channel inventory levels are well-managed and expected to facilitate strong cash flows, which could enhance earnings as the company repays debt and reinvests in the business.
  
• Ongoing share repurchase programs and dividend payments are expected to enhance shareholder value, potentially leading to improved earnings per share over time.

Smith & Wesson Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Smith & Wesson Brands's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.0% today to 3.8% in 3 years time.
• Analysts expect earnings to reach $20.1 million (and earnings per share of $0.46) by about March 2028, down from $29.8 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 33.6x on those 2028 earnings, up from 14.5x today. This future PE is greater than the current PE for the US Leisure industry at 17.5x.
• Analysts expect the number of shares outstanding to decline by 3.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Smith & Wesson Brands Future Earnings Per Share Growth

Risks

• Smith & Wesson's third-quarter revenues fell short of targets, with net sales down 15.7% compared to the previous year, impacted by lower demand for core products and leading to business challenges in maintaining revenues and net margins.
  
• A 4.6% decline in gross margin year-over-year was driven by lower production volumes and higher promotional costs, impacting overall earnings and financial stability.
  
• The company's outlook suggests a 5% to 10% drop in full-year revenue compared to fiscal 2024, with anticipated lower margins affecting net income and shareholder value.
  
• Consumer demand across the firearms industry appears soft, with economic pressures like inflation influencing discretionary spending, potentially affecting revenue and market stability.
  
• Decreased demand forecasted for Smith & Wesson's core products could result from internal product cannibalization, competition, and economic pressures, further impacting revenues and profit margins.

Valuation

• The analysts have a consensus price target of $13.833 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 $16.0, and the most bearish reporting a price target of just $12.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $525.7 million, earnings will come to $20.1 million, and it would be trading on a PE ratio of 33.6x, assuming you use a discount rate of 7.8%.
• Given the current share price of $9.8, the analyst price target of $13.83 is 29.2% 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.