Smith & Wesson earnings: Street expects strong results

Investors are watching earnings from firearms maker Smith & Wesson, which is due to report fiscal second-quarter results after the closing bell Tuesday.

Guns on display at an American Gun Works store in Los Angeles.
Jeff Daniels | CNBC

Gun sales typically spike after episodes of high-profile gun violence, and early indications are that the trend is happening again following recent terror attacks in San Bernardino and Paris. The quarter to being reported Tuesday won't include any sales spike that results from the most recent attacks, but Wall Street foresees a strong quarter for Smith & Wesson regardless.

The Springfield, Massachusetts-based gunmaker has beaten analyst consensus forecasts each of the past four quarters, and analysts say recent background check data show there was strength not only in handguns but rifles, which have higher margins.

For the quarter that ended Oct. 31, Smith & Wesson's earnings per share are forecast to more than double to 20 cents a share, according to analysts polled by Thomson Reuters, up from per-share earnings of 9 cents in the year-earlier period. Revenue is projected to rise 28 percent to $139 million.

Investors on the earnings conference call will be looking for projections about November and December trends and to see whether the company raises revenue and earnings guidance again for the full fiscal year ending in April 2016. Reports indicate that Black Friday, the traditionally strong retail sales day that follows Thanksgiving, set a record for most firearms background checks in a single day.

No dramatic increase in gun sales: Store owner
No dramatic increase in gun sales: Store owner

"Gun business is good," said Jeff Bregman, owner of American Gun Works in Glendale, California, 60 miles west of San Bernardino. "The firearms industry has always remained fairly steady in America. I'm not surprised that it's held up against the recession."

Smith & Wesson's stock has more than doubled so far this year and was up last week, along with rival gunmaker Sturm Ruger, after the mass shooting in San Bernardino on Wednesday. The terrorists in San Bernardino were armed with firearms made by Smith & Wesson, and the massacre that killed 14 people has renewed calls by some politicians for tougher gun laws.

"People are running out to try to get guns because they recognize that the politicians are trying to take guns away from them," said Joseph Cornell, a gun dealer in Denver. Such fears on the part of consumers may explain previous sales spikes, though recent history has shown that U.S. mass shootings have not resulted in stricter federal gun laws.

Smith & Wesson's handguns represented about three-quarters of its firearms revenue in the most recent quarter.

"Smith & Wesson I can't keep on my shelf," Bregman said. "The ones that are California-compliant are not easy to get ahold of."

Last week, adjusted National Instant Criminal Background Check System data for the month of November showed a 7.7-percent increase on a year-over-year basis. The adjusted firearms data are supplied by the National Shooting Sports Foundation and based on the FBI's published NICS information.

"Following strong NICS checks-growth in the month of November, we are also hearing that Black Friday was particularly strong," BB&T Capital Markets analyst Brian Ruttenbur said in a research note Friday. "Handgun sales were strong in the month of November and the same is being reported for Black Friday."

The NICS figures are seen as a forward indicator for sales performance in the firearms/ammunition business.

"Beyond possible incremental demand being created by political/socially motivated events, i.e., recent mass shoots, we view the disproportionate handgun strength as due to increased popularity of smaller concealable pistols and revolvers used for personal protection purposes as well as higher ownership by women," C.L. King & Associates analyst Scott Stember said in a research note Friday.

Smith & Wesson could see potential upside should it win a $350 million contract to supply the Army's new service pistol. The company is partnering with General Dynamics to win the Army's Modular Handgun System program, and it will be competing with other gunmakers. Bids are due Jan. 28.