Stock Analysis & Ideas

The Story Behind Smith & Wesson Stock’s (NASDAQ:SWBI) Post-Earnings Plunge

Story Highlights

Smith & Wesson’s earnings report proves half miss, half hit. That wasn’t good enough to keep the company from careening downward in after-hours trading, though.

Recently, gun maker Smith & Wesson (NASDAQ: SWBI) revealed its Q1-2023 earnings results. While this is vital to shareholders, it’s also useful information for everyone else because one of the greatest political barometers in the U.S. is gun sales. However, SWBI’s earnings didn’t please investors, causing the stock to fall in after-hours trading. The company posted Q1 earnings per share of $0.11, not as much as the $0.20 per share consensus. Additionally, it was a far cry from the $1.57 per share posted this time last year.

Revenue, meanwhile, offered a brighter spot, comparatively. The company posted $190.2 million in revenue against projections calling for $167.68 million.

CEO and President Mark Smith noted that the company was “return(ing) to a normal demand pattern at the retail counter.” This, along with “temporary headwinds from inventory corrections within the channel,” combined to create a clearly down report.

The last 12 months for Smith & Wesson shares are down wildly for the year. This time last year, shares sold at around $21 each. Shares rose until a little ahead of Thanksgiving 2021, when a sudden sharp drop took shares down to around $16.

A short-lived rally followed and kicked off a long, slow decline. Now, the company’s shares are down around $12.40 in after-hours trading.

There’s a lot going on in the world these days that directly affects gun makers. Taking all these factors into account at once gives me a much cloudier picture than I would like. For that reason, I’m neutral on Smith & Wesson. There may be a big gain coming for the company, but that gain may not last long. Neither, come to think of it, may the company itself.

Is SWBI a Good Stock to Buy?

Turning to Wall Street, Smith & Wesson has a Moderate Buy consensus rating. That’s based on one Buy assigned in the past three months. Smith & Wesson’s price target of $26 implies 93.6% upside potential from the most recent closing price.

Investor Sentiment is Declining

Investor sentiment could be brighter at Smith & Wesson. It also could be much worse. Smith & Wesson currently has a Smart Score of 5 out of 10 on TipRanks. That suggests that Smith & Wesson is likely to perform in line with the market, going forward.

However, the picture is somewhat grimmer for insider trading. Right now, insider trading at Smith & Wesson is skewing negative. Insiders sold $78,200 worth of shares in the last three months. Worse, the only “informative” transaction in the last three months was an Informative Sell from director John Furman.

The aggregate is a little better once all the uninformative transactions are factored in. In the last three months, there has been just one Buy transaction reported against three Sell transactions.

Going back over the last 12 months, that ratio shifts to 17 Buy transactions and 17 Sell transactions. Insider sentiment has clearly shifted to the negative at Smith & Wesson.

So Much Depends on the November Elections

Right now, Smith & Wesson is largely in a holding pattern because of a major event due to hit in a little under two months — the November elections. For an example of the impact of politics on gun sales, one need only look back to 2016. That year, CNN Money declared President Obama “the greatest gun salesman in America.”

Why? Because political movements have the very real potential to remove gun rights in the United States. Those who anticipate the removal of such rights, in turn, move to purchase guns to take advantage of grandfathering clauses or take possession of weapons ahead of confiscatory measures.

Such measures have yet to actually emerge—at least, on any broad scale—but the threat of said measures keeps people buying.

That’s where November comes in. All 435 seats in the U.S. House of Representatives are up for grabs with this election. Additionally, just over a third—35 out of 100—Senate seats are also contested.

On a more minor note, 36 states will elect governors this year as well. This year has the potential to fundamentally shift the landscape and make guns extremely difficult to buy…eventually.

Thus, for right now, it’s the status quo for gun makers like Smith & Wesson. However, in another few weeks, it may well be anything but. The political landscape in the U.S. could shift into an unrecognizable state and take the future of Smith & Wesson with it.

Consider recent events; while the 2005 Protection of Lawful Commerce in Arms Act offers protection to gun makers whose products are involved in crime, recent events are wearing away at that protection. A House and Senate more closely aligned with gun control interests could effectively ruin Smith & Wesson.

Smith & Wesson sales have already declined over the last year. While sales increased from 2019 to 2021—there was a huge spike between 2020 and 2021—2022 saw a decline for the first time in three years. Some of that is likely connected to the previous over-buying, and that brings us to the next point — macroeconomic conditions.

Gun owners are no different from collectors in some regards. They buy weapons to suit their interests or personalities. Yet even they will likely shy away from buying more should prices on everyday needs go up, as they already have.

With prices on an upward tear and the economy souring, new firearms purchases may ultimately collapse regardless of the political environment.

Conclusion: Prudence and the Wait-and-See Approach

I will not blame anyone who thinks buying Smith & Wesson right now is a good move. After all, the company is trading around half its lowest price targets. That screams “entry point” to even the most casual observer. The upside potential here is spectacular as well. Still, Smith & Wesson is whistling past a graveyard right now. The 2022 election has the potential to make the gun industry occupy a slot in said graveyard, depending on how it all goes.

Macroeconomic factors that will shove gun purchases to the back of household budgets’ lines won’t help either. While many of these issues are still largely hypothetical, they do remain, and they weigh on corporate planning throughout the industry.

That’s why I’m neutral on Smith & Wesson; there are too many unresolved questions right now, and those questions won’t be resolved for around another two months.

Disclosure

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