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The share price of the leading firearm manufacturer, Smith & Wesson Holding Corporation (SWHC - Snapshot Report), plunged 5.7% on Tuesday, Aug 6, 2013, to $12.47 following an update from the Federal Bureau of Investigation (FBI) on Total National Instant Criminal Background Checks, or Total NICS.

As per the report, total checks were 1.284 million in Jul 2013, almost flat with 1.281 million in June. In Jul 2012, checks were higher at 1.301 million. A lower or flat check generally symbolizes lesser number of guns and ammunitions being sold.

Although the gun maker Smith & Wesson’s share price experienced a sudden drop, we believe the company will keep growing, even as the demand for firearms and accessories cools off.

Recently, Springfield, Mass.-based Smith & Wesson posted consensus-beating, fourth-quarter earnings. The company posted record fiscal fourth quarter of 2013 revenue of $178.7 million, an increase of 37.7% from the year-ago period, buoyed by higher demand.

Earnings came in at 44 cents a share, a penny higher than our expectation and 63% above the year-ago period. Gross margins were also up due to larger sales volumes, rising to 38.3% from 36.1%. The stellar performance was driven by impressive marketing, innovative new products, disciplined manufacturing execution and strict financial management. Smith & Wesson also expects to earn in the band of $1.30 to $1.35 per share on revenue of $605-$615 million for fiscal 2014.

Supporting its bottom-line forecast, in June, Smith & Wesson approved a buyback of up to $100 million worth of shares. The repurchase plan replaces a $15 million program announced in December last year. This includes $75 million that would be purchased through a fixed-price tender offer. Depending on the stock price and the number of shares purchased, this buyback will likely cut the number of outstanding shares by around 15%.

Hence, the company’s buyback announcement accompanied with an almost 38% surge in its fiscal fourth quarter top line reassures shareholders that all is well with the company.

However, we remain a little anxious about the apprehensions of tighter regulation for weapons in the wake of a series of unfortunate shooting incidents in the recent past. The Boston Marathon terror attack on Apr 15, 2013 and the tragic shootout at the Sandy Hook Elementary School Newtown, Connecticut on Dec 14, 2012 had sparked off fierce controversy about the proliferation of firearms.

With respect to the valuation, the present scenario looks attractive as Smith & Wesson is trading at a forward P/E of 9.5x, a 31.9% discount to the peer group average of 13.9x.  Return on Equity of the company is 51.9%, substantially higher than the peer group average of 9.0%.

Smith & Wesson retains a short-term Zacks Rank #1 (Strong Buy). Other well-placed stocks worth buying now include Sturm, Ruger & Company Inc. (RGR - Snapshot Report), Johnson Outdoors Inc. and Arctic Cat Inc. (ACAT - Snapshot Report). While Sturm, Ruger and Johnson carry a Zacks Rank #1 (Strong Buy), Arctic Cat holds a Zacks Rank #2 (Buy).

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