Play Rising Crime At A Discount With SWBI
Although the firearms market remains elevated and healthy with new entrants, it has cooled significantly from the height of the pandemic surge and seems to now be following pre-pandemic historical demand patterns – Mark Smith, Smith & Wesson (SWBI) CEO
Legendary gun manufacturer SWBI reported disappointing earnings after the close Thursday. The earnings made clear that – as CEO Mark Smith said above – the pandemic surge in gun sales is over. Revenue was down 31% and EPS 38% from the year ago quarter. As a result, SWBI finished the after hours -20%. This is the second straight quarter SWBI has been hammered on earnings.
However, I am convinced that SWBI is a terrific, deep value, vehicle to play rising violent crime in America. SWBI had $178 million in revenue and 69 cents EPS in the quarter. If business can simply stabilize at these levels ($700 million sales/year and $3 EPS/year), SWBI is an absolute steal. If that assumption holds, SWBI is trading at 1x forward sales and 5x forward earnings. I think SWBI is worth about twice those multiples or $30/share. If the assumption proves conservative – and gun sales buck market expectations and start picking up again – SWBI could be worth $45/share.
As I wrote in “The Zen Of Trading”, there’s a time to be stubborn and stick to one’s convictions and a time to be flexible and respect the message of the market. Based on my examination of the fundamentals and my sense of the rising trajectory of violent crime in America, I expect the gun market to be far stronger than market expectations are currently pricing into SWBI. Law abiding Americans will respond to rising violent crime by arming themselves in self defense – just like they did during the pandemic. It’s one of those situations where I’m willing to step in to buy a falling knife, not out of stubbornness but conviction grounded in thorough analysis. I’m taking a page out of Warren Buffett’s playbook when he bought American Express in 1963 during the Salad Oil Scandal – one of the best investments of his career. If I’m right, eventually the market will get the message.