SWBI - Smith & Wesson Brands

[JRM]

I didn't see a topic start for SWBI, so here it is.  I was curious if anybody knew much about the company.  I followed them loosely for years, but for the first time they appear optically cheap.  Forward P/E of ~5 according to Zacks.  Also debt metrics look good.

 

I have noticed that ammunition has been out of stock since before the election.  Also, AR-15 rifles have been good sellers.  I spoke with somebody who works for Midway USA, and they said simply that manufactures can't keep up with demand right now.  The ammunition they are selling is at a premium (I was looking at $1 per round .223 ammo today; historically pretty high).

 

Usually these things go in cycles, but right now seems to be the front end of a strong panic hoarding cycle.

 

 

[rkbabang]

Haven't been following them, but I did just hear about a recall on their M&P Shield .380 auto pistols.

[Spekulatius]

Revenue and earnings projections for 2022 are substantially down from 2021. These gun stocks have commodity like roller coaster boom and bust cycles.

https://app.tikr.com/stock/estimates?cid=414079&tid=2650917

[JRM]

I'm not sure if its worth the time to try to project earnings out that far for this type of business, unless the assumptions are very conservative.  Trying to predict 2022 earnings for this company is probably like trying to project 2030 earnings for most companies.

[Saluki]

I haven't followed them for a while, but this was a multi-bagger for me back when it was SAB, then SWHC.  I sold it when they didn't get the $800 million military pistol contract and McDonald got into the white house.  This stock does better when Dems are in charge because the crazies run out and buy more guns since they think that jack-booted federal troops with new pronouns are coming for their guns. With the military contract off the table and red team in the white house, it looked like dead money walking for a while.

 

Basically, they used to ONLY sell pistols, but had a valuable brand name so they started making rifles and licensing their name to people making other products which was a great source of free money (you might see cops riding S&W bicycles or a S&W metal detector in the airport if you look around). That was the growth story and it worked for a while.

 

If you look at the revenue from rifles compared to pistols for Ruger, you will notice that most of the money for Ruger is in the rifles, so S&W has room to grow it's rifle business even if the pistols don't grow.

 

This is a strange business though because fewer households own guns as the years go by, but the ones that do own more guns per household.  Last time I checked it was something like 6 guns per household (this is the average, so for every soccer mom that has a pistol for protection in the big empty house, there are survivalists with 40 or 50 and think they need more).

 

If they can keep growing rifles and get into new areas like shotguns (started in 2016) and ammunition to monetize their brand, they  can keep growing the topline.

 

When I owned it they also paid up for a lot of high growth brands (knives, fishing) when they became American Outdoor brands.  I thought this was a mistake since a school shooting or something could cause people to boycott the non-gun brands. 

 

And don't forget that lawsuits are always out there, so that should be a consideration in your risk/reward calculation.

[JRM]

That's good info.  Thanks.

 

In August of this year they spun off the outdoor brands part of the business.  It trades as AOUT.  It may be a decent value at a forward PE of 10.

 

SWBI now is a pure play on firearm sales. 

 

I was talking to a friend who worked in the sporting goods section at Wal-Mart during 2008 when he was in college.  When Obama was elected sales of guns & ammo were elevated for roughy 18-24 months.  I'm expecting a similar behavior pattern, but maybe more sales front end loaded with Biden's more aggressive stance on semi-automatic rifles.

[Castanza]

From an AR perspective S&W is not great quality. The AR market has quickly become something akin to the mattress industry. People are mre after the boutique brands specifically for AR than the big name brands.

 

Top Brands:

Bravo

Daniel Defense

PSA

Knights Armament

Colt

Yankee Hill

Lewis Machine and Tool

 

Why? Because these are what top tier military assets carry. All of these "tacticool" range monkeys will gladly fork over 3-6k for a rifle they use to shoot bottles on a weekend just so they can live semi vicariously.

 

From a handgun perspective S&W does seem pretty interesting. The Biden administration has talked about a potential import tax increase on foreign firearms or potentially outright banning some. Well top handgun brands are Glock, Sig, and S&W. So a ban or even a higher import tax on Glock and Sig could greatly benefit S&W. It's possible these brands could be exempt through as some of the military carries Glock and Siq.

 

Too many uncertainties to think about investing in this imo.

 

 

 

 

[rkbabang]

From an AR perspective S&W is not great quality. The AR market has quickly become something akin to the mattress industry. People are mre after the boutique brands specifically for AR than the big name brands.

 

Top Brands:

Bravo

Daniel Defense

PSA

Knights Armament

Colt

Yankee Hill

Lewis Machine and Tool

 

Why? Because these are what top tier military assets carry. All of these "tacticool" range monkeys will gladly fork over 3-6k for a rifle they use to shoot bottles on a weekend just so they can live semi vicariously.

 

From a handgun perspective S&W does seem pretty interesting. The Biden administration has talked about a potential import tax increase on foreign firearms or potentially outright banning some. Well top handgun brands are Glock, Sig, and S&W. So a ban or even a higher import tax on Glock and Sig could greatly benefit S&W. It's possible these brands could be exempt through as some of the military carries Glock and Siq.

 

Too many uncertainties to think about investing in this imo.

 

Most (all?) Sig firearms sold in the US are manufactured in the US(New Hampshire) I believe.  Glocks are all imported though.

 

[Castanza]

From an AR perspective S&W is not great quality. The AR market has quickly become something akin to the mattress industry. People are mre after the boutique brands specifically for AR than the big name brands.

 

Top Brands:

Bravo

Daniel Defense

PSA

Knights Armament

Colt

Yankee Hill

Lewis Machine and Tool

 

Why? Because these are what top tier military assets carry. All of these "tacticool" range monkeys will gladly fork over 3-6k for a rifle they use to shoot bottles on a weekend just so they can live semi vicariously.

 

From a handgun perspective S&W does seem pretty interesting. The Biden administration has talked about a potential import tax increase on foreign firearms or potentially outright banning some. Well top handgun brands are Glock, Sig, and S&W. So a ban or even a higher import tax on Glock and Sig could greatly benefit S&W. It's possible these brands could be exempt through as some of the military carries Glock and Siq.

 

Too many uncertainties to think about investing in this imo.

 

Most (all?) Sig firearms sold in the US are manufactured in the US(New Hampshire) I believe.  Glocks are all imported though.

 

You're right, I didn't realize they moved so much manufacturing here.

[rkbabang]

Yes, far from being an importer, SIG is the US's largest exporter of firearms.

https://www.nhpr.org/post/sig-sauer-already-largest-us-firearms-exporter-could-grow-bigger-rule-change#stream/0

[JRM]

Looks like SWBI is up a little bit today.  Anything going on in the world today?

[bizaro86]

Looks like SWBI is up a little bit today.  Anything going on in the world today?

 

LOL. Not an attempted coup in the US every day. Probably lots of guns get sold in the next two weeks.

[JRM]

gun registrations were up 34% yoy in December.  I bet they will sell everything they put on the shelf in January.  Can't have enough guns.

[rkbabang]

gun registrations were up 34% yoy in December.  I bet they will sell everything they put on the shelf in January.  Can't have enough guns.

 

It's like money.  You can technically have enough, you can even admit to yourself that you have enough, but more is still always better even after you reach that point.  How many billionaires cash out and go lay on a beach for the rest of their lives? 

 

There are a number of things that fall into this category.  Money, guns, ammunition, and books.

 

[RadMan24]

You can't find ammunition anywhere.

 

 

[Castanza]

You can't find ammunition anywhere.

 

You couldn’t find ammo 10 months ago when the pandemic started. Too bad I lost all mine in that boating accident.

[JRM]

You can't find ammunition anywhere.

 

You couldn’t find ammo 10 months ago when the pandemic started. Too bad I lost all mine in that boating accident.

 

did you lose all of your gold and silver, too?

[Pelagic]

Probably deserving of its own topic but anyone have any thoughts on the SWBI spinoff AOUT?

 

Broadly speaking 2020 provided a strong tailwind for most of their brands with increased boat and RV purchases as well as a shift toward outdoor recreation. I look at AOUT as an incubator for products in the sector, providing their marketing expertise and connections to their portfolio companies. If you think of 2020 as a catalyst for renewed interest in the outdoors, which I do, then AOUT looks like a reasonably priced way to gain exposure to the sector.

 

I'm not much of a gun person but it would seem like for those that are, increased regulations at the federal level might lead to increased spending on accessories for their existing guns, assuming budgets at the individual level remain stable. And if the specter of increased regulations drives gun sales then those new guns need optics, cases, etc.

 

Their investor presentation gives a TAM of around $100B for the outdoor market and most of their focus currently is in shooting sports ($16B) so smart acquisitions in some of the other categories provides a long runway before their brands start competing against each other too much.

 

 

 

[JRM]

I didn't give AOUT more than a cursory look, and I agree it could be a good set up as well for reasons you mentioned.

[RadMan24]

Hunting skyrocketed this year. Tough call if it remains up. Fly fishing is getting quite popular too..

[Jmac42600]

RGR trading at 10x LTM FCF. SWBI trading at 3.2x LTM FCF.

 

Obviously gun sales could slow from here but does anyone expect it to slow considerably? Wealth inequality has lead to the types of social unrest we've seen in 2020 and I don't expect it to continue. Plus we don't have the inventory issues that these companies have had for the last 4 years. Anyone have a company they prefer?

 

Ruger imo is the higher quality company with the more disciplined management team, better capital allocation, higher return metrics, high quality products, etc. However SWBI seems very cheap rn but the competitive advantage doesn't seem as strong.

[Pelagic]

https://www.washingtonpost.com/science/hunting-pastime-spikes-during-pandemic-conservationists-are-glad-heres-why/2021/01/08/d0342dfa-3e5c-11eb-8bc0-ae155bee4aff_story.html

 

Pretty good article with some stats in the form of increased hunting license sales. Remains to be seen whether the 2020 vintage of new hunters will stick with it or go back to whatever they were doing in 2019 when things return to normal although the relatively large spend on a gun, optic, attire, etc. makes staying with it easier after year 1.

[JRM]

RGR trading at 10x LTM FCF. SWBI trading at 3.2x LTM FCF.

 

Obviously gun sales could slow from here but does anyone expect it to slow considerably? Wealth inequality has lead to the types of social unrest we've seen in 2020 and I don't expect it to continue. Plus we don't have the inventory issues that these companies have had for the last 4 years. Anyone have a company they prefer?

 

Ruger imo is the higher quality company with the more disciplined management team, better capital allocation, higher return metrics, high quality products, etc. However SWBI seems very cheap rn but the competitive advantage doesn't seem as strong.

 

I'm not sure how reliable forward PE is at this point in time, but RGR has a forward PE of ~20 and SWBI has a forward PE of ~6.  Even though they may not be a top brand, my guess is people will panic buy anything available regardless of brand.

[JRM]

Looks like about a 60% increase in background checks compared to January of last year.  Looking forward to the earnings report in March.

 

https://www.fbi.gov/file-repository/nics_firearm_checks_-_month_year.pdf/view

[D33pV4lue]

Was in this back in 2018 partially because of the trading disconnect with RGR at the time. SWBI was down big while RGR was roughly flat at the time. Figured with the tax cuts + growth of the outdoors business they could earn substantially more in the next cycle. I exited over the summer probably too early but I couldn't wait to wipe my hands of it. My thesis had deteriorated with the spin-off and ultimately this was just a trade.

 

RGR is a far superior company with better management and higher quality product.  RGR caters to more high-end buyers. They put out limited-time editions that they earn a premium for. The average buyer in this sense is not a first-timer buyer but someone who has 5-10 guns already and is adding to their collection.

 

One of the things I didn't like is after the 2016 election SWBI aggressively cut prices to try to "keep market share". IMO they were just diluting the brand and reinforcing the fact that handguns are a commodity with limited pricing power. That being said looking at forward P/E provides little value it's a cyclical-commodity business with huge opposition and external risks so make sure your MOS is big enough.

 

You have to stay in touch with the gun blogs and forums as they can sour quickly on a product or hype it up. They also give you a good insight into the sentiment around certain companies. Hope some of this helps BOL.