Smith & Wesson: Packing Heat
Who can forget the .44 Magnum immortalized by Clint Eastwood in Dirty Harry. Gunmaker Smith Wesson also made history with its .38 Special, a standard police revolver for a century. But that's the trouble with the venerable, 154-year-old Springfield, Mass.-based gunsmith: too much living on legend.
Decades back, Smith Wesson held a near-monopoly on the law-enforcement market. Then SW's market share collapsed because the company failed to scoot fast enough from revolvers into pistols and higher-powered firearms that help outgunned cops fight the bad guys.
Lee Schulteis, who runs Alpha Hedged Strategies Fund, a mutual fund that employs hedging strategies, thinks SW (symbol SWB) is being reborn. He dates the turnaround from when new leadership took control in late 2004. Leveraging a highly recognizable, respected brand name (thank you, Hollywood), SW beefed up advertising and marketing to the recreational market and developed new lines of weapons, such as pistols and rifles for the military, and less-than-lethal technologies. The company is winning local law-enforcement contracts again and has garnered a series of contracts with federal agencies, including one to supply 75,000 guns to the Afghan army.
Smith Wesson's factories are running at only 50% of capacity. Schulteis sees that as a good thing. It's one reason he thinks the arms maker is in a strong position to win a U.S. military contract for 645,000 pistols worth between $300 million and $500 million. It helps that two rival bidders, Beretta and Glock, are both foreign outfits.
Revenues are growing 20% a year, but Smith Wesson has predicted a 50% increase in earnings, to $7.5 million to $8 million, in the fiscal year that ended April 30. The company forecasts profits of $12.5 million, or 30 cents a share, in the current fiscal year. Given the rate at which SW is winning new weapons contracts, Schulteis thinks the company could easily exceed earnings expectations.
The stock has gone ballistic, tripling to $6.62 since early 2005. Schulteis thinks the stock can trade at $9 to $10 over the next six to 12 months, and at $12 to $15 if Smith Wesson pulls down some large contracts. The company currently has a market value of about $260 million.