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Gunmaker Smith & Wesson isn't ready to admit that the Orlando shooting is huge for sales

Nicole Sinclair
Markets Correspondent

Gun-maker Smith & Wesson (SWHC) rose over 11% from Thursday’s close after reporting a monster quarterly report.

Revenue in the quarter grew 22% to $211 million. Earnings per share of $0.66 beat estimates of  $0.54 and the company-guided range of $0.51-$0.53.

This comes after a 7% rise on Monday following the Sunday shooting at an Orlando nightclub, which left 50 people dead and 53 wounded.

One reason the stock may be surging is because analysts believe the outlook provided by management is conservative, given it hasn’t accounted for a potential spike in demand that would come after the Orlando shooting.

“Basically, this guidance does not take into account any surge, any potential spike in consumer demand as a result of any of that,” CFO Jeff Buchanan said. “Basically, all we can do as a business is focused on the things we know, and delivering our – and execute our strategy. So with regard to what happened, any impact on demand is unknown and therefore is not included in our guidance.”

“Shares should benefit from not only a sizeable 4Q beat but also a view among investors that the solid guidance given on Thursday is beatable given what is assumed to be a surge in demand in coming months following the Orlando tragedy,” Wedbush analyst James Hardiman said.

The FBI will release its monthly background check data from its National Instant Criminal Background Check System (NICS) in the beginning of July. It’s seen as the best indicator of monthly gun sales.

“The recent tragic shooting in Orlando and subsequent gun control discussion are now expected to drive growth in background checks in the short-term,” Hardiman said.

The Orlando shooting adds to an already tragic list of gun violence over the past year that includes the Inland Regional Center for developmental disabilities in San Bernadino, California in December; a Planned Parenthood clinic in Colorado Springs, Colorado in November; the Emanuel African Methodist Episcopal Church  in Charleston, South Carolina in June of last year.

Event-driven sales

The rally in Smith & Wesson shares reflect data showing strong gun demand after tragic events.

 The chart below highlights some of the most widely reported tragic events and the spike in gun background checks, which is a proxy for demand, following the violence.

The largest month of growth for firearm background checks was January 2013, which saw an increase of more than 90%, according to Wedbush. This demand surge was prompted initially by the re-election of President Barack Obama, who had made tighter gun control legislation a part of his platform during the 2012 campaign and in the aftermath of the July 2012 shooting in Aurora, CO. The Newtown, CT tragedy a month after the November 2012 election further prompted an effort to ban assault rifles and high-capacity magazine pistols. These events caused a flood into stores, but no ban materialized given lack of support in  Congress.

And when it seemed demand trickled off a bit, a handful of high-profile tragedies (beginning with the tragedy in Charleston, SC) hit the news in fairly quick succession, sparking a renewed interest by many to enact new gun regulations. The industry saw double-digit growth last summer.

Data suggests, contrary to common sense, that Democratic presidents have been very good to the gun industry, at least in the short run, according to Wedbush securities. The drive? The National Rifle Association (NRA) has seized on regulatory comments that prey on gun advocates’ fear of governmental confiscation of guns.

Yet, still, the likelihood of any actual gun legislation is exceedingly low, according to Wedbush. This should allow Smith & Wesson to continue to soar.