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Take aim on two gun makers
Smith & Wesson and Sturm, Ruger are not for the gun-shy. Both manufacture revolvers and pistols -- and both are starting to see a bright future. Heres why.
By Jon D. Markman
With Harley-Davidson (HDI, news, msgs) backfiring and Coca-Cola (KO, news, msgs) in the can, the past year hasnt been the greatest for famous American consumer brands associated with the great outdoors and sunny summer months.
But two U.S. icons have started the season off with a bang. Both are small caps: Smith & Wesson (SWB, news, msgs), maker of the nations most popular line of revolvers, and Sturm Ruger & Co. (RGR, news, msgs), maker of the nations most popular line of pistols.
There are a number of structural, legal and specific reasons why shares of the countrys only two public firearms manufacturers are blazin.
Lets start with Smith & Wesson, probably most famous as the original manufacturer of the powerful .357 Magnum pistol. This is a company that has had more owners over the past 150 years than your basic Saturday night special, but its latest group of executives appears to finally have it on track. Founded in 1852 by Horace Smith and Daniel Wesson, it passed through any number of hands, including earlier incarnations of the auto-parts makers Lear (LEA, news, msgs) and Tomkins (TKS, news, msgs), before merging with a small public outfit called Saf-T-Hammer in 2001.
Shares kicked around the $1 level for a while, then spent three years at around $2 to $2.50 before shooting up to the $4.50 zone in the past three months. The stock went up 13% right after the terror attacks in London. Smith & Wesson's new leaders have expanded its focus from its traditional niche in consumer handguns under the Smith & Wesson and Walther brands -- 80%-plus of current sales -- to take aim at more commercial opportunities in the $2 billion market for U.S. firearms. They have also indicated they will launch a long-gun division -- the industry term for rifles and shotguns. These would be the first with the Smith & Wesson label.
A market dominated by Europeans
Until now, three foreign companies have, strangely enough, dominated sales of high-end firearms to U.S. law enforcement officers and the military: Glock, of Austria; Beretta, of Italy; and Sigarms, of Switzerland. On July 14, Smith & Wesson continued its move to break their stranglehold on the domestic market by announcing it had hired two former Glock sales leaders into its top law-enforcement sales posts.
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Two weeks ago, the company announced it had hired a former top official of a major Beretta division to head up its effort to enter the long-gun market. S&W is already the largest U.S. maker of handcuffs, so it already has sales people talking to law enforcement agencies.
It should do well in its new fields. Recent industry surveys have shown that buyers consider Smith & Wesson their No. 1 choice even in product areas in which it does not now participate, such as shotguns and ammunition. Eric Wold, an analyst at the San Francisco-based brokerage Merriman Curhan Ford, said the company may also diversify into the less-than-lethal niche -- the province of pepper spray, stun guns and beanbag guns.
Wold is the only analyst with published earnings estimates. Without including anything but forecasts for the consumer handgun division, he sees the potential for Smith & Wesson to earn 16 cents per share in fiscal 2005 and 21 cents in 2006. If you put a 25x multiple on 2006 earnings, you get $5.25, or more than 16% above its current perch at $4.51. If you think that its efforts to push more powerfully into the law enforcement and long-gun markets will be successful, you could estimate the company might earn 30 cents or more in 2007.
The sooner the company makes the break toward a wider sales opportunity, the better. According to numbers assembled by Wold from federal sources, the rate of growth of the $460-million-a-year handgun market has slowed down to a 3.6% clip. That's not enough for Smith & Wesson to maintain its current share price. To gain more new users, the company has used some of its cash hoard to innovate. It has done well with a .50-caliber Magnum, dubbed the Model 500, which reportedly has three times the muzzle energy of a .44-caliber Magnum round. (The Model 500, whose barrel is more than eight inches long, is mostly marketed to hunters.)
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