Is It Time To Pull The Trigger On Smith & Wesson Brands?

If the insider and institutional activity can be used as a guide, it is time to pull the trigger on Smith & Wesson Brands (NASDAQ:SWBI). While neither group has been aggressively buying the stock, buying the stock they are, and we think this trend will continue. The Q4 results prove the company’s efforts to streamline operations and improve profitability are working and fueling what we consider to be a safe dividend.

On the insider side of the equation, insiders haven’t made a sale in 4 consecutive quarters, while two major insiders and a director all made purchases since the start of the year. On the institutional side, the institutions have been net bullish for the 3 of the last four quarters, including the current period in which they upped their holdings by a total of 2.2% of the market cap. They hold more than 55% of the stock, and the figure is growing.

Smith & Wesson Brands Falls On Results

Shares of Smith & Wesson Brands fell in the wake of the Q4 report but let's be fair. The stock had just surged 27% on the heels of a major Supreme Court victory. The Supreme Court upheld the 2nd amendment by striking down an onerous New York law that severely limited public ability to exercise their constitutional rights.

But, back to the point at hand, Smith & Wesson Brands reported $181.3 million in net sales, a decline of nearly 44% YOY. The decline is mainly due to tough comps in the prior year that were spurred by the combination of COVID stimulus and the shift to outdoor activities related to COVID. The revenue is also down -by 6.1% in the two-year stack, but the takeaway is this: Smith & Wesson Brands improved its gross margin by 760 basis points versus the pre-pandemic level to drive strong results on the bottom line.

Moving down to the earnings, the gross margin came in at 39.8%, or down from the previous year but better than expected. This led to an adjusted EBITDA margin that is also down from the previous year but up in the 2-year stack and better than expected. On the bottom line, the company reported $0.79 in GAAP earnings and $0.82 in adjusted EPS which beat the consensus by $0.15. The real takeaway, however, is that full-year results include YOY margin and cash flow improvement that allowed the company to hike the dividend for the 2nd time since the spin-off of American Outdoor Brands (NASDAQ:SWBI).

Turning to the balance sheet and the dividend, the company’s balance sheet is as strong as ever. The company is not only net cash, but it carries no debt; cash is on the rise, as is the inventory. Cash levels are up only slightly YOY, but the inventory is up roughly 75%, while total liabilities are also falling. In this light, we view the 2.23% dividend as not only very safe but also a high probability of future increases. The company just increased by 25%, the second high-double-digit increase in a row, and there is ample room for double-digit increases to continue for the next few years at least.

The Technical Outlook: Smith & Wesson Brands Is In A Reversal

The price action in Smith & Wesson Brands hit bottom well before the Supreme Court decisions and is now deep in a reversal. The post-release pullback in prices is a concern and an opportunity to get into the name while it trades at only 7.25X its earnings. Assuming the market can maintain support above the $14 level, we see it trending sideways from here but with an upward bias. The top of the current range is near $16.50 and may cap gains in the near to short-term.

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