Smith & Wesson (SWBI)

American firearms manufacturer Smith & Wesson (NASDAQ:SWBI) fell short of the market’s revenue expectations in Q4 CY2024, with sales falling 15.7% year on year to $115.9 million. Its non-GAAP profit of $0.02 per share was in line with analysts’ consensus estimates.

Company Overview

With a history dating back to 1852, Smith & Wesson (NASDAQ:SWBI) is a firearms manufacturer known for its handguns and rifles.

Leisure products cover a wide range of goods in the consumer discretionary sector. Maintaining a strong brand is key to success, and those who differentiate themselves will enjoy customer loyalty and pricing power while those who don’t may find themselves in precarious positions due to the non-essential nature of their offerings.

Competitors in the firearms market include Sturm, Ruger & Company (NYSE:RGR), Vista Outdoor (NYSE:VSTO), and American Outdoor Brands (NASDAQ:AOUT).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Smith & Wesson struggled to consistently increase demand as its $493 million of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Smith & Wesson’s recent history shows its demand remained suppressed as its revenue has declined by 2.2% annually over the last two years.

This quarter, Smith & Wesson missed Wall Street’s estimates and reported a rather uninspiring 15.7% year-on-year revenue decline, generating $115.9 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 2.7% over the next 12 months. While this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.

Smith & Wesson’s operating margin has shrunk over the last 12 months and averaged 8.3% over the last two years. The company’s profitability was mediocre for a consumer discretionary business and shows it couldn’t pass its higher operating expenses onto its customers.

In Q4, Smith & Wesson generated an operating profit margin of 3.6%, down 5.4 percentage points year on year. This contraction shows it was recently less efficient because its expenses increased relative to its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Smith & Wesson’s EPS grew at a weak 1.9% compounded annual growth rate over the last five years. This performance was better than its flat revenue but doesn’t tell us much about its business quality because its operating margin didn’t expand.

In Q4, Smith & Wesson reported EPS at $0.02, down from $0.19 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects Smith & Wesson’s full-year EPS of $0.56 to stay about the same.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Over the last two years, Smith & Wesson’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 3.3%, meaning it lit $3.30 of cash on fire for every $100 in revenue.

Smith & Wesson burned through $16.15 million of cash in Q4, equivalent to a negative 13.9% margin. The company’s cash flow turned negative after being positive in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Smith & Wesson hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 25.3%, splendid for a consumer discretionary business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Smith & Wesson’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Smith & Wesson reported $26.7 million of cash and $143.2 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $77.62 million of EBITDA over the last 12 months, we view Smith & Wesson’s 1.5× net-debt-to-EBITDA ratio as safe. We also see its $4.48 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Smith & Wesson beat analysts’ EBITDA expectations this quarter. On the other hand, its revenue missed. Overall, this was a weaker quarter. The stock traded down 8.1% to $10.15 immediately following the results.

Updated: May 22, 2025 at 10:56 PM EDT

Before investing in or passing on Smith & Wesson, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

We cheer for all companies serving everyday consumers, but in the case of Smith & Wesson, we’ll be cheering from the sidelines. To kick things off, its revenue growth was weak over the last five years. And while its stellar ROIC suggests it has been a well-run company historically, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its cash burn raises the question of whether it can sustainably maintain growth.

Smith & Wesson’s P/E ratio based on the next 12 months is 16.9x. This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $13.83 on the company (compared to the current share price of $9.52).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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