22 weekdays in August 2013. 2 weeks scheduled vacation=10 days lost. 8 days lost due to ERP transtion. Total days lost 18 out of 22.
One of the assumptions I made, and of which I am unsure, is that SWHC is capacity constrained for most SKU's (product lines). James Debney said the modern sporting rifles and hunting rifles are a little softer than the handguns, so presumably are demand constrained. I assume the handguns are still capacity constrained, and there is still a huge backlog. He mentioned that the huge CAPEX program, $60 million for the Houlton Maine retooling, and the Springfield Mass redesign, is to increase production. If he had spent less on CAPEX, income would have been greater. Evidently he felt a need to increase production.
2015 CAPEX will be less than this year, but Mr. Debney could not estimate a figure.
If SWHC is capacity constrained for most products, then NICS checks, which measure demand, are irrelevant. But if there is too much supply, as in modern sporting rifles, NICS checks are more important and growth limiting.
The last unknown with regard to SWHC is the effect of the share repurchase. If revenues were completely flat, and if repurchases continued, EPS would grow reflecting the shrinkage of shares. Not sure how much free cash is available to repurchase shares. Jeff Buchanan, CFO, said forward projections assume they're not buying any more shares That's unduly pessimistic..
Conference call transcript is now availabe on SEC Edgar site, and also SWHC corporate site.
Financial commentators consistently misreport the positve outlook for SWHC. Today's WSJ headline: "Gun Sales Show SIgns of Cooling." They should have said "Gun Sales not accelerating as fast for the month of November, but still growing for the year." Then, they said, "Smith and Wesson Holding Corp. said late Tuesday that its profit in the trhree months ended October 31 fell 20% from the year-earlier quarter as sales rose just 2%." The author might have said sales and profits from continuing operations surged despite unscheduled factory downtime. The author of the WSJ article was one James R. Hagerty.
Smith Wesson management forecast Q3 revenues of $140-145 million. In the year-ago quarter, revenues were $136.2 million. Subtracting out Watlther revenues of $12.7 million implies 2013 Q3 revenues were $123.5 million from continuing operations.. . Last year, there were 66.4 million weighted average shares. Revenue from continuing operations per share was 123.5/66.4=$1.88/share.
This year, about 56 million shares outstanding, against $142 million revenues, or $2.53/share. That means revenues per share from continuing operations will increase 34.5% from last year.
You will never see this calculation in any discussion of SWHC outlook in mainstream media outlets. Instead, they will talk about the "era of negative NICS", as though the share price should rise or fall depending on NICS. That's a fallacy, because the estimated one-year backlog will drive sales out of proportion to the NICS checks, which will, in any case, be at seasonally high levels. In fact, I estimate by the time adj NICS recover, in May 2014, SWHC will still be working on its backlog. I can't see negative revenue comps at any time in the future.
Short sellers like to talk about NICS checks, but they don't like to mention profits. The reason is that companies, such as Ruger, with a one-year backlog, make huge profits even when NICS are negative. Also, I noticed the backlog is holding at a steady level, even though Ruger declares a moratorium for new orders every January. What would be the backlog if they allowed distributors to place orders in January, February, and March?
James Debeny, SWHC CEO, said in the conf call year-on-year adj NICS will be negative until April or May. There has been strong demand for M+P Shields, and concealed carry firearms, but softening demand for modern sporting and hunting rifles. He believes industry in long term growth pattern. Firearms are now a mainstream durable good purchased on Black Friday. He is expanding production capacity by modification to the Springfield and Holton factories. His CFO projects annual revenue $610-620 million, EPS =$130-$1.35/share.
Quarterly production negatively impacted by ERP conversion disruption and Thomson recall, at least $20 million lost revenue.
KeyBanc analyst Brett xxxx filled in for Scott Hamann. His question:"What is the distributor appetite for product, as we enter this era of difficult NICS comparisons?" James Debney reply, "Consumers, not retailers, determine demand for firearms. Modern sporting rifles are a little soft, but concealed carry products are not replenished in the inventories. M+P Shield is one of the hottest products for concealed carry, low inventories."
Today Reuters reported that Cerberus, owner of Bushmaster maker Freedom Group, is going to "allow investors to exit" from their investments. Later in the article, it is reported that University of California, and the California Teachers Retirement System are still Cerberus investors. Evidently, they never got around to selling their gun investments, despite their rhetoric.
Also, Freedom Group reported 9 months revenues up 51% y-o-y to $1.02 billion, against net income of $94.2. Compare with Ruger, which had 9-month revenues of $506 million, and net income of $84.6 million. We can see that a lot of Freedom Group revenue disappears before it winds up in the net income account. Must be some mighty high management fees involved.
Lastly, both Savage Arms and Freedom reported robust revenue growth, which means that SWHC is likely to beat expectations tomorrow when it reports.
Since Brian Rafn is investment manager at Morgan Dempsey, and sounds very astute in the Ruger conf call and CNBC interview , I combed through Morgan Dempsey's 13F information table, to see whether the firm owned any more stocks like Ruger. In particular, I was looking for small cap growth stocks. I checked out Eaton Vance, Granite Construction, Gorman-Rupp, J+J Snack Foods, National Presto, Aptar #$%$ hasty inspection, they don't seem to be growing as fast as Ruger, although they are doing well in general. Has anybody else looked at these?
The firearms market in the U.S. is growing steadily since 2008, but Ruger is growing much more quickly. They are taking advantage of virtually unlimited demand for Ruger product to grow capacity faster than the overall market, while growing operating margin at the same time.
-----------------Total adj NICS---Ruger production---Operating margin---
--------2008-----8.43 million-------600 thousand--------?
I estimate RGR earnings at $6/share for 2013, so we have a stock trading for 12x earnings growing earnings at 40% annually, based on increased unit sales, market share gains, improving operating margin. There is one more tremendous advantage Ruger possesses--the market analysts are publishing bogus research to force the price down, and investors are compelled to conduct their own due diligence. Also, the small market capitalization blocks the elephant investors, like Berkshire Hathaway, from buying shares. Finally, the PC considerations block Fidelity and many others.
Running out of room on this message....
I agree, the NICS check was a very strong number. Now we have to see if Mr. Debney low-balled his earnings estimate for the quarter, in order to get an easy beat....
December NICS checks were 1.81 million in November, compared with 2.00 million in November of 2012, and 1.53 million in 2011.. This was the 7th highest NICS check in the 180 months since FBI statistics begin in November of 1998. I believe this means Ruger will sell out all their production this quarter.
Individuals may own Ruger in their Fidelity accounts, but the Fidelity managed funds, such as Magellan and Contrafund, do not.
Look at the top 15 institutions owning Ruger, on a site such as Yahoo or Microsoft Money. Fidelity shows no position. Compare with the institutional ownership of Wells Fargo, Facebook, Microsoft, Google, or any other stock you can think of. Fidelity is usually among the top 5 institutional owners for any stock on the NYSE, because of the huge size of their funds..
I believe Fidelity management feels it is bad politically for them to invest in a firearms manufacturer. They are based in Boston MA.
RGR has a P/E ratio 13x, annual revenue growth 49%, anything they make they can sell immediately, market demand growing faster than supply, no debt on the balance sheet, many investors, such as Fidelity, banned from purchasing shares.......Retail investors finally get a chance to buy shares at a fair price. There is no other company like this one.
Margin of safety is greater with SWHC.
I estimate RGR earning $6.05 for 12 months ending December 31, 2013. That gives a P/E ratio of 12.7x at today's price.
Management estimates SWHC earning $1.32 for the most recent 12 months, and P/E ratio =9.1x at $12/share. I estimate SWHC could earn $1.87/year, once they get past the computer changeover problems, which amounts to a forward P/E ratio of 6.4x.
Both companies are selling every firearm they can make, and are sold out many months in advance. Both companies have operating margins close to 26%, and high cash flows. Both are making major capex due to anticipated growth. Both have excellent CEO's, and are among the fastest growing companies in the U.S..
What are your estimates for earnings and growth rate?
Am thinking about purchasing a firearm for myself for Christmas. Do all firearm transactions generate the same paper trail? Or are the rules less burdensome at the shows? I need a weapon for home defense, but wouldn't want it to be taken from me if my state of Illinois succeeded in outlawing weapons..
At today's closing price, $11.84 per share, SWHC forward earnings of $1.87/share implies P/E ratio=6.3x. Still a tiny bit lower than some of the other stocks out there. Another interesting industry player is ATK at about 11x forward earnings, sold out of bullets months in advance....
I assume that on a day such as today, with relatively low volume, short sellers have not attempted to cover yet. I they capitulated there would be a huge surge in volume.
This is an interesting topic. I couldn't find much about "hard-to-borrow" fees on-line, or about "utilization." A Google search takes me to DataLend as the only source of information. I wonder how much you have to pay to borrow Ruger shares, so you can short them....Maybe 7% annually...anybody know?