Article from Barrons on gun sales

Fired Up for Smith & Wesson

Wedbush Morgan sees more market-share gains and more military pacts.

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Smith & Wesson Holding (SWHC: Nasdaq)

Wedbush Morgan Securities ($4.36, March 9, 2009)

WE MAINTAIN OUR Buy rating [on Smith & Wesson (ticker: SWHC)] and raise the price target to $5 from $4 to reflect surging industry gun sales.

Given robust industry sales in handguns and tactical rifles, the company's continued market-share gains in these categories, and potential upside from upcoming U.S. military contract awards, as well as an improving balance sheet as the company pays down debt and lowers inventory, we believe shares of Smith & Wesson should trade at a calendar 2009 price-to-earnings multiple of 17 times, an approximate 10% discount to its nearest company comparable, Sturm Ruger (RGR), given Smith & Wesson's debt balance, thus generating our price target of $5.

Industry data indicate a retail sales surge in firearms, likely related to the change to a Democratic administration. According to the FBI's National Instant Criminal Background Check System (NICS), the number of background firearm checks, an indication of retail sell-through, increased 31% in the October-January quarter versus the prior year.

We believe this sharp acceleration in sales largely reflects belief that the election of a Democratic presidential administration could result in tightening of gun-control laws. Such beliefs were reinforced when Attorney General Eric Holder indicated last week that the Obama administration would attempt to reinstate a ban against semiautomatic rifles previously in effect from 1994-2004.

Key competitor and major outdoor retailers report significant increase in firearm sales in recent months. Outdoor retailer Cabela's (CAB) reported same-store sales increased 2.2% in the fourth quarter, due to the sale of firearms and related accessories. Similarly, Gander Mountain (GMTN) saw a significant improvement in its same-store sales in the quarter, due in part to strong sales of firearms.

Sturm Ruger, a key competitor, reported fourth-quarter 2008 sales of firearms jumped 42% versus the prior year and 81% sequentially, primarily due to increased sales of pistols. The sharp increase in orders resulted in the company increasing production 29% during the year, working through its entire finished-goods inventory, and still reporting an order backlog at the end of the quarter 167% higher than the prior year. We anticipate Smith & Wesson results will reflect such strong industry sales, given the company's M&P [military and police] series of pistols and tactical rifles continue to gain market share.

Expect third-quarter revenue of $73 million and earnings per share of three cents. We forecast total revenue to increase 9% over the year-ago quarter, with increased sales of pistols and tactical rifles partially offset by sluggish shotgun and hunting-rifle sales.

Smith & Wesson is scheduled to report fiscal third-quarter (January) results after market close on Thursday, March 12.

-- Rommel T. Dionisio

-- Kurt M. Frederick, CPA