Innovative Firearms And Strategic Buybacks Poised To Boost Revenue And Shareholder Value

Key Takeaways

• Solid product pipeline with next generation Bodyguard 2.0 and continued demand for the 1854 lever-action rifle expected to drive revenue growth.
  
• Expansion of manufacturing capacity and disciplined cost management likely to improve revenue, net margins, and shareholder value through operational efficiencies and a new buyback program.
  
• Smith & Wesson's financial outlook shows potential revenue and net margin pressures due to softer demand, competitive pricing, and increasing operating expenses.

Catalysts

Designs, manufactures, and sells firearms worldwide.

• The introduction of the next generation Bodyguard 2.0 handgun and continuing demand for the 1854 lever-action rifle indicate a solid pipeline of new product innovations expected to drive revenue growth through increased consumer interest and sales.
  
• Expansion of manufacturing capacity, specifically mentioned in relation to the 1854 lever-action rifle and the Bodyguard production, is likely to enhance the company's ability to meet demand and improve revenue and net margins through better fixed cost absorption.
  
• Disciplined cost management and an improvement in gross margins, up 80 basis points year-over-year, reflect operational efficiencies that can positively impact net margins through enhanced profitability measures.
  
• Execution of a new $50 million buyback program signals strong cash flow management and commitment to shareholder value, potentially impacting earnings per share (EPS) positively through reduced share count.
  
• Indications of a rebound in demand as the company enters the busy fall season, despite previous softer market conditions, suggest potential for sales growth and earnings improvement in the second half of fiscal 2025 compared to fiscal 2024, impacting revenue and net margins positively.

Assumptions

• Analysts are assuming Smith & Wesson Brands's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 10.7% in 3 years time.
• Analysts expect earnings to reach $73.0 million (and earnings per share of $1.66) by about October 2027, up from $34.4 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 13.4x on those 2027 earnings, down from 17.5x today. This future PE is lower than the current PE for the US Leisure industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 0.67% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Risks

• Softer than anticipated firearms demand in the first fiscal quarter and the summer season indicating potential volatility in consumer demand, which could affect future revenue and net margins.
  
• Continued inflationary pressure on consumer discretionary spending could lead to lower foot traffic and spending at retail partners, negatively impacting revenue.
  
• Intense competition in the firearms market, especially with the introduction of lower-priced entry-level handguns, which may require increased promotional activity and affect gross margins.
  
• A significant portion of revenue being driven by new product launches such as the Bodyguard 2.0 and the 1854 lever-action rifle, posing risks if these products fail to meet ongoing consumer expectations or face production challenges, affecting revenue and product mix.
  
• An increase in operating expenses due to higher promotional costs, new product development costs, and legal costs, which could reduce net income if not offset by corresponding revenue growth.

Valuation

• The analysts have a consensus price target of $18.67 for Smith & Wesson Brands based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $681.4 million, earnings will come to $73.0 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 6.9%.
• Given the current share price of $13.41, the analyst's price target of $18.67 is 28.2% higher.
• 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.