Will Obama keep helping Smith & Wesson?

The company reports earnings tomorrow after the close. Have sales peaked?

By Jamie Dlugosch Mar 10, 2010 1:42PM

Gun sales have been strong as owners stock up for fear new controls are on the way. But gun stocks haven't climbed as much as you'd expect.

 

Smith's earnings report could give them a boost.

 

So far, investors betting on stocks of gun manufacturers like Smith & Wesson (SWHC) and Sturm Ruger (RGR) to move higher because of fear President Obama will tread on gun rights have to be a little disappointed.

 

Yes, shares have gained 60% and 80% respectively since the Obama administration took office, amid strong sales and many reports of gun owners stocking up. But during a rally in which many stocks have posted similar or better results, the numbers aren't entirely spectacular.

 

Perhaps Thursday’s earnings announcement from Smith & Wesson will set shares on a path higher?

 

Given the fear of a clampdown on gun rights -- founded or not -- you'd expect to see these stocks move even higher. At least, SWHC shares look cheap today. And gun sales are unlikely to disappoint.

 

Sales of guns surged in 2009, but after an announcement that order backlogs were shrinking at Smith & Wesson, the stock dropped 35% in market value.

 

Fears may have eased somewhat because the president and his colleagues in Washington have been mostly silent on gun issues since taking power. Skeptical states, not taking any chances, are also moving to loosen gun laws while they can.

 

But gun owners are a dedicated lot -- witness recent moves challenging governments and businesses like Starbucks on the right to carry weapons -- so I'd say this Obama trade isn't over.

 

 

In addition, the impact of the recession and widening gap between haves and have nots supports more sales of guns. There is more going on in the gun market than gun enthusiasts buying arms. New owners looking for protection are walking into gun stores.

 

While background checks for gun purchases, a tip to gun sales strength, have decreased this year compared to last, they are only running down 12%. Even if Obama decides to stay quiet on guns sales should trend higher from current levels.

 

Shares of SWHC rose slightly last week in advance of earnings. Analysts are expecting the company to post a profit of $.01 per share on revenues of $92.57 million in the quarter ended January 31, 2010.

 

For the full year ending April 30, 2010 analysts expect SWHC to earn $.35 per share with that number jumping 17% to $.41 in the following year. These estimates include knowledge of a sales slowdown.

 

At $4.71 per share SWHC trades for a paltry 11 times 2011 estimates. That price represents remarkable value as compared to expected and unforeseen growth.

 

If the company beats estimates, as I expect, tomorrow shares could jump significantly higher. Smith & Wesson is one of my Top 10 stocks for 2010.

 

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