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From The Shooting Wire Newsletter:

Shooting Business Attracts Attention

Forbes' analyst Carl Gutierrez said it all: "Smith & Wesson ate lead Friday."

In October, S&W stock (nasdaq:SWHC) dropped its 2008 forecasts, admitting to the equities markets that their gangbuster numbers for 2007 couldn't be maintained going into 2008. For that announcement, S&W stock took a pounding, dropping from its near-record high to a considerably more modest number. It has been trading in those more moderate ranges since then, dropping back to a level analysts told The Shooting Wire they felt could be "maintained, barring no more bad news."

Thursday, after the market close, Smith & Wesson announced larger second-quarter earning and sales than analysts had expected (good news), but cut the 2008 projections for the second time. The drop to a forecast of 40 cents per share earnings instead of the 52 cents average estimated (expected) by analysts wasn't well received at all.

On Friday, large investors sent Smith & Wesson a message: "We don't like surprises" -sending shares down more than twenty-nine percent to a closing price of $7.08.

Following Wall Street's activities is equivalent of fortune-telling. If your quarterly earnings improve (S&W's did- from $2.85 to $2.9 million), but your forward projections drop, they hammer you. Ditto if sales are up ($71.4 million vs $51.4 million).

Wall Street analysts, not the most forthcoming of souls to outsiders, say they're watching the stock closely to see if the arrival of a late winter does, in fact, send hunters into the field. The company says it has seen long gun sales lagging due to unseasonably warm weather - hurting the hunting market, primarily their sales of Thompson/Center product and their new i-Bolt bolt rifle in the S&W line.

Two of the analysts we spoke with say they're pleased at the reception law-enforcement is giving the M&P product line. Smith & Wesson has won 80% of the law-enforcement evaluation tests in which it has competed, with sales to 264 law enforcement agencies across the country.

But the analysts point to the late deliveries on the iBolt (September) as one reason they're concerned. Cowen & Co. analyst Cai von Rumorh says retailers he's talking with tell him they're overstocked- to the point that one "big box" retailer cancelled an order on the new rifles for that reason.

A little more than a week ago, Smith & Wesson made some cutbacks in personnel, primarily temporary workers, and slowed production. They're not the only manufacturer in the industry to have done that - and others will undoubtedly follow suit - most likely in the first quarter of next year. S&W explains the layoffs as a normal part of their business. The majority of the workers, after all, were temporary workers.

The company may also be guilty of bad judgment when it rolled out - en-masse - a very aggressive menu of sales incentives. In those programs, sales of new products enabled purchasers to get a second gun from S&W's more-established lines for very little additional money. Some retailers told The Shooting Wire the sales incentives were an attempt to bolster softening sales -and appreciated- but the paperwork involved was not something they were welcoming with open arms.

Much of that grumbling is predictable when any new procedure is introduced by any manufacturer. Like gunmakers, firearms retailers are sometimes slow to embrace any change in long-established procedures. "It's always been done this way," is not an unexpected response to any change.

Like Sturm, Ruger & Company, Smith & Wesson is being hammered for events that haven't yet happened. That's one of the high prices you pay for playing in the equities market. Another is the fact that you have to be concerned with quarterly numbers when you probably should be looking far further down the road. Again, that's part of the cost of equities. Most disconcerting may be the realization that publicly-traded firearms manufacturers are doing business in a marketplace where the experts don't mind your making them money, but never miss an opportunity to hammer you philosophically.

As the stock markets open this morning, like always, we'll keep you posted.

--Jim Shepherd