Smith & Wesson (SWBI): Buy, Sell, or Hold Post Q3 Earnings?

Smith & Wesson has been on fire lately. In the past six months alone, the company’s stock price has rocketed 45.2%, setting a new 52-week high of $11.43 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Smith & Wesson, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Smith & Wesson Will Underperform?

Despite the momentum, we're cautious about Smith & Wesson. Here are three reasons there are better opportunities than SWBI and a stock we'd rather own.

1. Revenue Spiraling Downwards

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Smith & Wesson struggled to consistently generate demand over the last five years as its sales dropped at a 10.2% annual rate. This was below our standards and is a sign of poor business quality.

2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Smith & Wesson has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.1%, lousy for a consumer discretionary business.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Smith & Wesson’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Smith & Wesson doesn’t pass our quality test. Following the recent rally, the stock trades at 39.7× forward P/E (or $11.43 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.

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