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Smith & Wesson Holding Corp. (SWHC - Snapshot Report) reported third quarter fiscal 2014 earnings from continuing operations of 35 cents per share, beating the Zacks Consensus Estimate of 29 cents by 20.7%. The number was also higher than the year-ago earnings of 26 cents per share by 34.6%. The bottom-line beat came on the back of higher sales.

Operating Highlights

Total revenue in the quarter increased 7.1% year over year to $145.9 million, above the Zacks Consensus Estimate of $142.0 million. Handgun sales advanced 29.9% from the year-ago quarter defying the present gun sales trend.

The company continues to launch new products, as seen in the SHOT Show held in January, particularly in the revolver category. These products were well received with incremental orders pouring in from customers.

During the quarter under review, gross profit increased 17.6% year over year to $58.7 million. This corresponds to a gross margin of 40.2%, up 360 basis points year over year, buoyed by a favorable product mix, absorption, and manufacturing efficiencies, accompanied with reduced promotions and the absence of lower-margin Walther product sales.

On the cost front, operating expenses were $27.5 million, or 18.9% of revenue, compared with $21.9 million, or 16.1% of revenue recorded in the third quarter of fiscal 2013. The increase was due to its enterprise resource planning (ERP) implementation initiated early in the second quarter.

Operating income in the quarter was $31.1 million, up 11.0% year over year.

Financials

The company ended the quarter with cash and cash equivalents (including restricted cash) of $45.3 million versus $100.5 million as of Apr 30, 2013. Operating cash stood at $29.6 million in the quarter and capital expenditure was $10.2 million. Free cash flow was $7.6 million while the company used $15.3 million in cash from financing activities, mainly for its stock repurchase program.

Guidance

For its fiscal fourth quarter,  Smith & Wesson forecasts GAAP earnings from continuing operations between 37 cents and 40 cents a share on revenues of $159 million to $164 million. The Zacks Consensus Estimate calls for revenue of $165.0 million and earnings per share of 37 cents.

For the fiscal year ending April 30, the company lifted its expectation. It now expects GAAP earnings per share of $1.39 to $1.42 (versus $1.30–$1.35 earlier) on the back of sales of $615 million to $620 million (versus $610–$620 million earlier). Analysts expect fiscal year earnings of $1.35 a share on revenue of $617.0 million.

Our Take

Smith & Wesson continues to post strong results. The firearm maker has surpassed our expectation for the last eleven quarters.

Since the reelection of President Obama in 2012, gun sales have surged, on fears 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, Conn. on Dec 14, 2012, had sparked off fierce controversy about the proliferation of firearms.

In fact, Springfield, Mass.-based Smith & Wesson benefited from the demand leap during the reported quarter. However, as a caveat, the possibility of a new gun law might have an adverse impact on gun sales in the future.

Smith & Wesson Holding Corp. manufactures, designs and supplies a large variety of firearms and related items to its worldwide customers.  

Peer Comparisons

The leading publicly traded U.S. firearms maker, Sturm, Ruger & Company, Inc. (RGR - Snapshot Report) reported fourth quarter 2013 earnings of $1.33 per share, in line with the Zacks Consensus Estimate. The quarterly figure improved 33% from $1.00 per share earned in the year-earlier quarter, driven by higher sales volume.

TASER International Inc. (TASR - Snapshot Report) continued its earnings momentum in the fourth quarter of 2013. It reported earnings of 13 cents per share during the quarter, an 85.7% improvement from 7 cents per share earned in the year-ago period. The reported figure even surpassed the Zacks Consensus Estimate easily by 160%. The upsurge was driven by higher sales.

Zacks Rank

Smith & Wesson currently has a Zacks Rank #3 (Hold). A better-ranked stock worth buying now is Marine Products Corp. (MPX - Snapshot Report) with a Zacks Rank #2 (Buy).

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