The past six months have been a windfall for Smith & Wesson’s shareholders. The company’s stock price has jumped 72.7%, hitting $14.94 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Smith & Wesson, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Smith & Wesson Will Underperform?
We’re happy investors have made money, but we're cautious about Smith & Wesson. Here are three reasons you should be careful with SWBI and a stock we'd rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Smith & Wesson struggled to consistently generate demand over the last five years as its sales dropped at a 12.2% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Smith & Wesson has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 3.1%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
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. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Smith & Wesson doesn’t pass our quality test. Following the recent rally, the stock trades at 47.5× forward P/E (or $14.94 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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