Smith & Wesson Brands: The Upcoming Election Is The Ultimate Catalyst

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Smith & Wesson Brands has a rich history and recently refocused on firearms, boosting dividends and share repurchases, enhancing shareholder value.Despite recent challenges, SWBI offers a 4% dividend ...

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Pavel Muravev/iStock via Getty Images It is time to return to the land of Americana. There are few brands that are more iconically American than Smith & Wesson Brands (NASDAQ:SWBI). Smith & Wesson The history of Smith & Wesson dates back more than 150 years to the humble beginnings of Horace Smith and Dan Wesson. Since, the company has cemented itself as one of the largest firearm brands, and one of few publicly traded gun manufacturers. Embedded in the company’s branding is unapologetically American culture. The following excerpt is printed on the SWBI’s homepage. Since 1852 Smith & Wesson has empowered Americans with the freedom, equality, and security promised by the Declaration of Independence and guaranteed by the Bill of Rights. It is this sense of safety and security that frees us to pursue our goals and dreams, define our future, and fulfill the promise of America. Company Overview In the past, we’ve covered SWBI stock. The primary focus of our historical coverage was SWBI’s business and examining the corporate transformation that occurred in 2020-2021. SWBI has evolved over the years and at one point combined with American Outdoor Brands to form a more comprehensive line of outdoor products. This included firearms, camping equipment, clothing, knives and more. The conglomerate struggled and was unable to gain traction as a diversified outdoor retailer. Several years of tepid performance inspired action, primarily the separation of Smith & Wesson from the remainder of the brands. This included spinning off Smith & Wesson into a separate public entity, SWBI. Once again, the company would become a firearm's manufacturer, abandoning the remaining product lines in favor of a more concentrated approach. Throughout the combination and recombination, Smith & Wesson’s product lines and customer relationships remained largely unchanged. Another more recent development has been the relocation of the company’s headquarters to Maryville, TN. Despite returning to a pure play firearm company, SWBI continues to innovate. According to SWBI’s annual report, the company launched over 100 new products last year. However, the spinoff did more than just redefine the subtleties around the brand. The more significant change was management’s forward commitment to making changes to capital allocation. The two largest pieces of this puzzle were the initiation of a quarterly dividend and the introduction of a share repurchase program. In 2020, SWBI declared their first dividend of $0.05 per share. Today, shares of SWBI are paying $0.13 per quarter, an increase of 160% over the course of just four years. This corresponds to a compound annual growth rate of 24.4% over the past three years. Based on current share prices, SWBI’s dividend yield is over 4%. The current payout corresponds to a payout ratio of under 65%, meaning there is plenty of room for future dividend growth within SWBI’s current cash flow. The dividend has historically been updated in the second quarter of the calendar year, most recently increasing from $0.12 per share to $0.13 per share. Currently, the dividend looks secure with room for expansion. Data by YChartsSWBI has also decreased the outstanding share count considerably over the past several years. Since April 2021, SWBI has reduced outstanding shares from 48.0 million to 44.9 million, a decrease of 6.5%. While less robust than some repurchase agreements, it has successfully added value to shares. Looking forward, the board of directors authorized a new $50 million share repurchase program for the next year. Based on SWBI’s current valuation, this corresponds to around 10% of the company’s market capitalization if fully executed. Since SWBI also carries no debt, this means it’s roughly 10% of the entire enterprise. Data by YCharts Valuation Over the past two years, SWBI has faced systemic challenges stemming from several sources. First, the COVID pandemic was an extraordinary one time demand driver for firearm ownership. SafeHome provides estimations of gun sales based on government background checks. As displayed below, there were an estimated 22 million firearm sales in the United States in 2022. This means somewhere around one in six households purchased a firearm during the calendar year. This is irrespective of the tens of millions of firearms sold annually leading up to the pandemic.   SafeHome Second, commodity prices, labor costs, and other costs increased over the past two years. This put pressure on bottom lines during a weak market when demand was already suppressed. The compounding of these two issues amounted to weak financial performance over the past two years. Last month, SWBI reported Q1 earnings for the fiscal year. Top-line earnings reflected sales pressure from the aforementioned factors, which reduced net sales to $88.3 million, a 22.7% decline from the comparable quarter of the prior year. CEO Mark Smith provided commentary on the soft quarterly sales, seeming optimistic that autumn could accelerate. Overall firearms demand during our first fiscal quarter was softer than we anticipated, but our results once again proved the resiliency of our flexible manufacturing model, which allows us to adapt quickly to any market conditions and still deliver on bottom-line profitability targets. Importantly, while the usual summer seasonality was more pronounced this year, demand has already begun to rebound as we enter the busy fall season. CFO Deana McPherson corroborated the commentary and said August sales data was already a significant increase over the summer data. She remained confident that full-year revenue would increase by “mid to high single digits” for the full year. Data by YCharts SWBI’s stock price has declined as a result, currently sitting below $13 per share. Based on forward earnings, shares of SWBI are trading at just 12.3x forward earnings. However, these estimates are still based on a tepid market which has been suffering from limited demand. Shares are currently trading 28% from 52-week highs, and SWBI trades around the highest dividend yield since the payment was initiated. Firearms manufacturing is a small industry, especially for public companies. There are two major domestic firearm manufacturers who are publicly traded, SWBI and Sturm, Ruger & Company (RGR). RGR is a similar company to SWBI from the perspective that the company has no debt, pays a quarterly dividend, and is a pure play firearm manufacturer. RGR even has an interesting dividend policy of maintaining a 40% payout ratio, leading to variable dividends. Data by YCharts However, RGR is also considerably more expensive than SWBI, trading at around 18x forward earnings. Year to date, shares of RGR have declined by around 10%, compared to 5% for SWBI. As we covered in recent coverage of RGR, part of the reason is RGR’s ineffective share repurchase program. Despite both companies actively repurchasing shares, only SWBI has materially reduced outstanding shares. Data by YCharts From this perspective, SWBI is a more shareholder friendly company than RGR. This reflects the shareholder aligned capital allocation strategy that emerged from the spinoff. Upcoming Demand Driver Referencing the chart above, we can identify a relatively predictable pattern of peaks and troughs for firearm demand. Looking closer, we begin to notice that these periods of increasing demand occur roughly every four years. The chart shows an increase in 2012, 2016, and 2020, each then followed by a tempering. It comes as absolutely no coincidence that these are election years for the presidency. The next presidential election will occur on November 5, 2024, less than 30 days from today. The election has already become one of the most contentious in recent memory, with two polarizing candidates going head-to-head, to secure the position of the most powerful person on Earth. With discussion of key policy issues inevitably comes discussion around gun control. There are few topics more hotly debated than the right to bear arms. Each side has a passionate perspective of what’s at stake and uses political pressure to further their goals. The election becomes a recurring flash point of these controversial issues. As the spotlight highlights the discussion, demand for firearms typically increases.   NICS For example, in 2008 and 2012, the presidential election coincided with NICS Firearm Background checks nearly doubling over the course of several months. Typically, the prospect of a new legislation brings fears of sweeping firearm bans. As we look to the election ahead, firearms are sure to take center stage as a key issue for public policy. Should the democrats win the Presidency, as was the case in 2008, 2012, and 2020, firearm demand is likely to pick up. For companies like SWBI, this creates enthusiasm, which has historically propelled shares. For the company, it would mean a return to an accommodative sales environment that could provide additional capital to fund the dividend and share repurchases. Risks Although SWBI is in a strong financial position, the company faces ongoing systemic risks associated with the manufacture of firearms. One of the largest risk factors facing companies like SWBI is legislative action. The legal environment for gun makers and firearm dealers is complicated and continues to evolve in real time. The regulatory landscape has been increasingly challenging since congress passed the National Firearms Act, one of the first major pieces of firearm related legislation. This week, the Supreme Court will hear a challenge to a recent law regulating the production and sale of incomplete firearm kits. Independently, the Biden administration has taken unilateral action on gun violence, including a recent executive order. The order includes the expansion of the federal background system and the implantation of red flag laws. These policies are intended to reduce gun violence, but introduce increased regulation and complexity to an already arduous sales process. Many of these laws do not directly impact companies like SWBI who operate under long-term supplier contracts with large customers such as government agencies. However, the regulatory landscape with firearms is a one-way street with increasing complexity for dealers and manufacturers. However, political pressure can cause other forms of risk to materialize. As mentioned earlier, SWBI recently relocated from Massachusetts to Tennessee, citing the increasingly unaccommodating political landscape in the company’s hometown. While the company touted the benefits of moving to a more gun-friendly state, the costs associated with the move amounted to more than $100 million, which was funded by cash on hand. While the new facility provides operational enhancements for SWBI, it was still largely spurred by increasing political pressure. Conclusion As the stars begin to align for SWBI, the company is in a strong position. Following several years of weak demand, SWBI is ready to capitalize on potential political turmoil following the election. With less than 30 days until the polls open, the catalyst is charged and demand is likely to surge. Shares are currently priced around 12x earnings, with a dividend yield above 4%. A strong market could supercharge shares of SWBI in the form of massive dividend growth fueled by more cash flow and additional share repurchases.  Editor's Note: This article was submitted as part of Seeking Alpha's Best Value Idea investment competition, which runs through October 14. With cash prizes, this competition -- open to all analysts -- is one you don't want to miss. If you are interested in becoming an analyst and taking part in the competition, click here to find out more and submit your article today!","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2474444302"}