For Smith & Wesson, Load, Cock and Fire Another Round

It’s time for another round of Smith & Wesson (SWBI) .

I targeted this iconic gunmaker in December and showed why my covered-call strategy appeared to hold some firepower. The shares got knocked down approximately 10% from that time, but given the hit taken by the markets, especially in small-cap names, the recommendation has easily outgunned the overall market. With the option premiums and a couple of dividend payouts, it has actually shown a gain over that time.

Those options expired out of the money last Friday; I “rolled” my position forward before expiration, collecting another premium along the way. Right now, I believe Smith & Wesson makes a good trade to fire off again, and the investment case on the stock is still strong. The gun legislation making its way through Congress is a very minor negative, as it will restrict few gun sales.

Meanwhile, felony rates continue to surge in most American cities and crime is one of the top things on voters’ minds. A Supreme Court decision this week reaffirmed the Second Amendment, which was a mild positive. The company also reported fourth-quarter 2022 results on Thursday, showing earnings of 82 cents a share, 15 cents a share above the consensus estimate. For the year, the company had adjusted earnings of $4.25 a share. Revenues were down some 44%, but that was just above expectations, as well. The company and just about every gun and ammo manufacturer saw a massive surge in demand during the pandemic, it should be noted.

The stock sells for just over $16.50 a share and sports an approximate $600 million market cap. The company ended FY2022 with approximately $120 million worth of cash and marketable securities on the balance sheet against no long-term debt. Management is so confident about its financial position it just announced a 25% hike to its quarterly dividend payout and the stock now yields 2.5%. Smith & Wesson repurchased $90 million worth of shares in FY2022 as well.

Manufacturing has done a good job implementing a flexible manufacturing model. This allows the company to maintain strong profitability during periods of sharp declines in revenue, by keeping fixed cost low and manufacturing cost absorption rates high. Revenues are expected to continue to fall off pandemic highs in FY2023, but the stock is still expected to make over $2.25 a share in profit. This leaves the shares price at four times trailing earnings and just over 7 times forward earnings with a decent dividend yield.

The stock is even cheaper if you equate for the cash hoard on the balance sheets. And given current politics, it is not hard to see an event occurring that spikes gun sales yet again. Finally, the company should be completed moving its headquarters from Massachusetts to Tennessee in the second quarter of this fiscal year.

Option Strategy

Here is how one can initiate a position in SWBI via a covered call strategy. Using the January $17.50 call strikes, fashion a covered call order with a net debit in the $14.10 to $14.20 a share range (net stock price – option premium). This strategy provides nearly 15% of downside protection and 25% of potential upside including dividends.