September 26, 2022 - 3:58am EST by
2022 2023
Price: 10.35 EPS 0 0
Shares Out. (in M): 46 P/E 4 0
Market Cap (in $M): 474 P/FCF 12 0
Net Debt (in $M): 42 EBIT 160 0
TEV (in $M): 405 TEV/EBIT 2.53 0

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Smith and Wesson spun off their sports and outdoors division (American Outdoors Brands) in the past few years and has a cheap valuation due to a subpoena and destocking of inventories. S&W CEO Mark Smith refused to attend court hearing while CEOs of other U.S gun manufacturers showed up. Despite such negative news, S&W outpaced the market by over 28% in terms of production volume. Many of these gains were attributed to catering models to new firearms owners who are now loyal to the Smith & Wesson brand.

Mark Smith and management are good capital allocators— cash generated in 2021 was used to pay off 160M debt, return over 8M to shareholders through dividends and buybacks– outstanding shares were reduced by over 14%, all in the first 10 months since the spin-off.



There are a few reasons to invest in Smith and Wesson:

1.    S&W uses their flexible, third party manufacturing model to expand, while maintaining their fixed cost base during good years instead of employing leverage. This allows S&W to be at a level so that they’re profitable in any market conditions. Despite regulation and a cyclical industry, domestic growth has been steady.


2.     Production is moving from Massachusetts to Tennessee (assume 20-25M for normal CapEx and 90-95M in relocation CapEx) as this keeps assembly close to distribution. Tennessee has more lenient regulations towards gun control (machining operations are staying in Springfield, MA), while debt has been lowered.


3.     Capital allocation from CEO Mark Smith and his management team are shareholder minded— in terms of any further share buybacks authorization, the tax rules make it so that S&W will have to wait until August of 2022 which is the 2-year mark post-spin off from the parent (American Outdoors Brands).


4.    S&W is a strong brand name in a fragmented industry with innovative in products, specifically concealed firearms. This allows for the S&W to increase their ASP to absorb additional expenses from law suits, inflation, etc.


5.    Fundamental product line adjustments to embrace demographic such as new gun owners, women, and minorities shows that management adapts to customer needs. S&W ensures that products are always available at the retail counter, with a diverse product line catering to different preferences.


6.   The recent subpoena encountered will be dealt with as mentioned in Mark’s earning’s calls.



Total addressable market and competitors  

As of 2022, the total addressable market for the U.S. Guns & Ammunition Manufacturing (firearms) in the U.S is approximately 22-28B based on a volume of 6 to 9 million firearms manufactured a year. There are more than 80 million active gun owners in America.

FBI’s National Instant Criminal Background Check System (NICS) approximates the number and type of gun from background checks— providing insight into sales trends and consumer demand. However, NICS does not directly correlate to shipments due to inventory levels. NICS checks for new concealed pistol permits are currently outpacing checks for actual firearms.

Consumer demand among gun owners is cyclical— starting in 2009, Glock-type semiautomatic handguns, purchased for personal protection, began to outsell rifles, which have been typically used in hunting. Buyers capitalize on periods where there is loosening of gun restrictions by the Supreme Court, Congress and Republican-controlled state legislatures.

Please note the distinction between the U.S annual figures of firearms sold and manufactured.

From the graph above you can see that in 2019 approximately 7M guns were manufactured but 13.5M guns were sold. More than 11M guns were manufactured in 2020, but the gun industry had exceptionally high growth in sales in 2020 at 21.6M when 2019 had 13.5 million guns sold (60% increase). That number then fell slightly to 18.8 million in 2021 (a 12.96% decrease).

In 2020 alone, U.S. gun manufacturers produced 10 to 11M firearms, up from 5.4M in 2010. By 2021, 18.8M firearms were sold. While that was a 12.96% decrease from 2020, with 21.6 million guns sold, it’s still an 88% increase from 2010, when around 10M guns were bought. The growth rate is about 4 to 8% annually.

Gun manufacturers make more than the shop owners who sell to consumers. The markup on guns can be as low as 10%, leaving shop owners with very little profits. In addition, only a small number of gun-makers dominate the market. The top five pistol manufacturers alone controlled over 70% of all production in 2020: Smith & Wesson; Sig Sauer; Sturm, Ruger & Co.; Glock and Kimber Manufacturing. Four states – Texas, Florida, California, and Pennsylvania – had at least a million estimated gun sales in 2020.

According to a 2018 survey conducted by the nonpartisan Small Arms Survey, which monitors gun ownership, there are around 400 million guns in the United States. As of 2021, guns per capita in the U.S. reached a staggering 120.5 guns for every 100 residents. For a U.S population of roughly 300M, that’s about 393M civilian-owned firearms across the country, that means there are 67 million more guns in the U.S. than there are people.


About 1 in 3 Americans report owning a gun, while 42-44% American households own at least one firearm— this means that most gun owners have more than one gun— of the 42-44%, 32% of those are personally owned guns and 10% shared among the household.