Smith & Wesson, A Timeless Value Play At Decade Lows

Shares of Smith & Wesson Brands NASDAQ: SWBI are advancing by as much as 6.6% in the after-market hours of Thursday evening; the sudden pop in the stock comes amid the company reporting its quarterly earnings results. Despite posting some slowdowns, investors are still looking to Smith & Wesson as one of the stable and reliable cash-flowing businesses that typically command higher valuations during a questionable economic cycle like todays.

The stock has been on a steady decline starting in 2021 after it retraced from its all-time high price of $39.61 per share; two years later, investors have had to endure a painful 77.2% decline in their holdings.

Despite the lackluster financial performance reported over the past twelve months for the business, an exciting dynamic is developing in favor of the stock as investors compare all the relative drivers and valuations within the sector. Competitors in the defense niche, other companies like Sturm Ruger & Company NYSE: RGR, are trading at significantly higher valuation multiples. However, the stock performance over the past twelve months is a near mirror relative to Smith & Wesson's.

This dynamic begs the question of whether the advance in the stock after-market, despite slowing financials, can act as a sign of the times, digging Smith & Wesson as a value play.

Results for the Quarter

Smith & Wesson analyst ratings seem to land on a consensus 13.4% upside potential from today's prices, with a top-side price target shooting towards $13.5 per share, a price which translates into a 20.1% ceiling from Thursday's closing price of $11.24 per share. On an annual basis, relative to the same quarterly period during 2022, Smith & Wesson's net sales declined by 20.1%.

This should have been enough to send the stock sliding lower after the announcement, especially when investors add the effects of inflation on top of this slowdown. Gross margins saw a similar decline, going from 39.8% in 2022 down to 29.0% as input costs and shortages harshly affected the underlying business operations.

These trends fed into the company's bottom line, trickling down into a final 61.2% contraction in reported net income. Earnings per share, the main driver behind investor decision-making, took a less aggressive dive of 35.5%. The gap between the declines in net income and earnings per share is mainly driven by a positive indicator driving sentiment today.

Management retired as many as two thousand shares off the open market, allocating $90 million to this program. Through these buybacks, investors saw their ownership share grow. They understood where the stock's valuation lies in the eyes of insiders.

Despite the company operating in the defense niche, it ultimately lives within a retail ecosystem and thus abides by its dynamics. The retail industry has faced inventory problems for the past two years, and Smith & Wesson was no exception. However, these issues dug out an escape route for the reported quarter.

Mark Smith, CEO commented that the company ended the quarter with eased headwinds "... elevated channel inventory throughout the first half of the fiscal year abated." Now that these pressures are seemingly off the radar, the business may tread upwards in expanding the affected gross and net margins.

Relative Perception 

Besides Smith & Wesson insiders believing the stock to be cheap, as demonstrated by their willingness to deploy $90 million into purchasing shares, other reliable indicators suggest the stock is overdue for an advance. Perhaps these headwinds and secular trends were already priced into the stock.

Now that the skies are clearing up again, any news that represents a positive development in the company may see its effects amplified through the stock price advancing. Investors can see these trends developing, primarily via valuation multiples and today's dividend yield.

Sturm Ruger & Company is selling today for a 12.8x price-to-earnings ratio, significantly higher than Smith & Wesson's modest 8.6x. Despite this significant gap in valuations, the two stocks are in near lock-step performance as of the past twelve months, implying that the potential for a price advance is significantly more present in Smith & Wesson.

Furthermore, today's stock is sporting a 3.6% dividend yield, which marks one of the highest payouts since the company initiated its dividend in 2020. A historically high dividend yield would suggest two things, either the stock price needs to rise to 'normalize' this yield, or the dividend payout itself needs to be trimmed. Since the P/E ratio is the lowest valuation since the financial crisis 2008, no investors should expect a dividend cut.