Zachary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This week, gun manufacturer Smith and Wesson (NASDAQ: SWHC) announced fourth-quarter earnings that handily beat expectations, as customers purchased guns faster than the company could manufacture them. US citizens are increasingly worried about stricter gun control regulations and are purchasing firearms now, instead of waiting to see how new regulations will be drafted. More people buying guns means higher profits for Smith and Wesson.
Calls for gun control spark demand for firearms
Gun control has been a hot political issue this year following the Sandy Hook Elementary School shooting. Advocates of gun control measures want to place tighter restrictions on what type of guns can be distributed, and who can purchase these firearms. Opponents cite the second amendment (the right to bear arms), claiming that further restrictions on gun purchases infringe on their constitutional rights.
Gun manufacturers have been the primary beneficiary of the heated debate, as US citizens have been aggressively buying firearms. Gun buyers fear that new regulations will keep them from purchasing firearms in the future, so they are buying more guns now while they still can.
Smith and Wesson can't even manufacture guns fast enough to keep up with the increased demand. The company beat earnings expectations for the fiscal fourth quarter ending April 30, but profits could have been even higher if the company had more guns to sell. The earnings press release stated that most of its product lines are sold out, and customers are placing orders for more guns, leading to growth in the company's order backlog.
With so much demand, the primary challenge for Smith and Wesson is to grow it's production capacity. The company is already expanding its manufacturing lines, and recently raised about $50 million which will be used to further grow its production capability.
Since the company already has a growing backlog of orders, and will be increasing its manufacturing capacity, I expect earnings to continue to climb over the next several quarters.
Other firearms companies are also seeing an increase in demand. Sturm, Ruger (NYSE: RGR) is expected to grow earnings by 30% when it reports quarterly earnings next month. Over the past 90 days, analysts have increased their full year earnings estimates by 13.5% as sales increase.
Ammunition maker Olin (NYSE: OLN) is also seeing growth in its business as consumers buy bullets for their new guns. Analysts expect Olin to grow earnings by 15% this year, and the stock is trading at an attractive valuation of just 11 times this year's expected earnings.
Olin also pays a 3.4% dividend yield, which makes it attractive for income investors. (The stock is still likely to trade higher as consumers buy more bullets for their new firearms.)
A tremendous investment value
For the fiscal year ending April 30, Smith and Wesson earned $1.22 per share. Considering the company's growing backlog of orders, and commitment to growing its manufacturing capacity, I expect the company to continue to grow profits over the next year.
The stock is currently trading below $10, which represents a tremendous value. We can buy shares today and pay only eight times earnings to own a piece of this growing company.
Investors appear to be skeptical of the company's future growth, worrying that consumers will not buy more guns in the future because they have already booked massive purchases over the past several quarters. But considering the company's extensive backlog of orders, it is clear that demand continues to be strong, and it will take some time for the company to fill all of its orders.
So for the next several quarters, we should see strong earnings for the Smith and Wesson as it completes sales currently in the backlog, and continues to take new orders from customers.
Buy Smith and Wesson now, before shares trade higher
As the gun control debate continues to rage, I expect demand for firearms to continue to grow. This should drive strong first-quarter profits for Smith and Wesson, and create more value for shareholders.
Sturm, Ruger could also turn out to be a catalyst when it reports earnings on July 31. If that company is able to beat expectations the way Smith and Wesson did this week, investors will likely buy both stocks.
Amid growing demand for firearms, I would not be surprised to see Smith and Wesson's stock hit $14.50 before the end of the year. Even this would only represent a valuation of 12 times current earnings. At this price, investors could book a gain of nearly 50% over a six-month period.
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