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The board of directors of Smith & Wesson Holding Corporation (SWHC - Snapshot Report) – the leading firearm manufacturer – approved the buyback of an additional $15 million worth of stock, to be completed by June 30, 2013. The repurchase will be funded by the company’s cash in hand and its working capital.

On December 6, 2012, the board of directors had authorized the buyback of $20 million shares which has been completed already.

The fresh authorization came in the wake of rumors that new gun restriction would be implemented in the U.S. A series of unfortunate shooting incidents in the recent past has triggered off controversy regarding gun permits and control. Following the tragic shootout at the Sandy Hook Elementary School Newtown, Connecticut, on December 14, the firearm manufacturer saw its share price drop by a sharp 10.5%.  

In this scenario, the timing of this additional share buyback raises questions.  Is this buyback a strategic move to arrest the plummeting share price, assuring shareholders that all is well with the company?

As a matter of fact Smith & Wesson has performed well during the first half of fiscal 2013 and exited the second quarter of fiscal 2013 with a firearm backlog of $332.7 million versus $149.9 million at the end of the comparable prior-year period. However, the possibility of a new gun law might have an adverse impact on gun sales in the upcoming quarters.

The present valuation looks attractive as Smith & Wesson is trading at a forward P/E of 7.87x, a 39% discount to the peer group average of 12.90x.  Return on Equity of the company is 46.3%, substantially higher than the peer group average of 7.3%. Smith & Wesson along with its peer Sturm, Ruger & Company Inc. (RGR - Snapshot Report) retains a short-term Zacks # 2 Rank (Buy).

We believe the strong backlog and solid fundamentals will see Smith & Wesson through these uncertain times.  

Based in Springfield, Massachusetts, Smith & Wesson Holding Corporation was founded in 1852. The company manufactures, designs and supplies a large variety of firearms and related items to its worldwide customers.  The company has 1,346 full time employees and a market cap of $0.54 billion.

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