I've Got Smith & Wesson in the Holster, but the Safety Switch Stays On

I wouldn’t jump the gun on this name, but here’s why I find it compelling.

Stocks quotes in this article: SWBI

As I was scouting for companies recently, I found one name that — while not ready to pull the trigger on — is worth setting your sights on.

Let me explain.

I was developing a list of companies trading at relatively low multiples of net current asset value, or NCAV. Some of the names I stumbled upon took me by surprise. In this particular search, which I refer to as “quadruple-net,” I am looking for companies trading at between three- and four-times NCAV. This is not used to create a buy list, but rather for advanced scouting purposes. Namely, I am looking for the next crop of companies that could ultimately be double-nets (trading at between one and two-times NCAC) or triple nets, if the market drops, and punishes these names.

Here’s the name that stood out: Gunmaker Smith & Wesson Brands (SWBI) . The company is down 23% year-to-date and 29% over the past year. SWBI currently trades at 3.96-times NCAV. The balance sheet is fairly solid; the company ended its most recent quarter with $107 million, or $2.30 per share in cash, and no debt. In the past two years, SWBI has reduced shares outstanding by 19% via stock buy backs.

In the third quarter alone, SWBI completed its $50 million share repurchase authorization; during the previous nine months, it bought back 2.788 million shares at an average cost of $17.93. Those repurchases are not sounding so great with the stock price currently hovering around $14, but the move could be construed as a display of confidence by management that shares are undervalued. (Skeptics, however, might call it a waste of capital). The company will be unable to repurchase additional shares until August, but fourth quarter results notwithstanding, it appears to have the capital to do so.

One of the issues hampering the stock has been recent earnings performance: SWBI has missed consensus estimates the past two quarters. For the most recent reported results third-quarter the company bottom-lined 69 cents per share, 17 cents below consensus.

In addition, estimated earnings fall off a table between 2022 (fiscal year ended in April) when SWBI is expected to earn $4.11, and 2023 with expectations of $2.27 per share. Revenue is also expected to drop, from $862 million to $674 million during the same period. Next year’s consensus estimates put the forward price earnings ratio at just 6.

SWBI is expected to report fourth results on June 17; the consensus is calling for revenue of $180 million, and earnings per share of 67 cents. Earnings revisions have not been a friend to SWBI; in late November, the Q4 consensus was $1.18/share.

A great deal of uncertainty is weighing on the stock; I am most interested in the prospects of a potential new share repurchase authorization, assuming the company will have the cash and cashflow to support it.

There is a small dividend sweetener here; SWBI currently yields 2.3%.

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