What a brutal six months it’s been for Smith & Wesson. The stock has dropped 28.7% and now trades at $9.68, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Smith & Wesson, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Smith & Wesson Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in Smith & Wesson. Here are three reasons why SWBI doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows 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 signals it’s a low quality business. 
2. Cash Burn Ignites Concerns
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.
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.
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. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Smith & Wesson, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 17.1× forward P/E (or $9.68 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Like More Than Smith & Wesson
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