Earnings Recap: Smith & Wesson (SWHC) Beats Estimates, Pressured By News Of DOJ Investigation

Earnings: Q4 profit of $0.08 vs. estimates of $0.04 and $0.14 for Q4 last year.

Revenue: Up 4.3% to $103.8mm vs. prior guidance of $97mm-$101mm.

“Although the period of heightened consumer demand subsided at the end of the company’s fiscal year, Smith & Wesson (NASDAQ: SWHC) was able to grow firearm sales, supported by a broad product portfolio that was strengthened by new products,” said CEO Michael Golden.

Comment: SWHC popped earlier this week after the U.S. Supreme Court rendered a decision stating that the right to bear arms is a fundamental right that states are bound to protect, invalidating a Chicago-based gun control law.  While the decision was a boon for the gun industry in general, SWHC happens to be well-diversified against gun control legislation, as a third of its sales are to police and other professionals.

Shares responded well the to the Q, trading up 7% and hitting one-month highs soon after the release.  However, shares ended the week near pre-report levels as news of a DOJ investigation pressured the stock.  The DOJ alleges that SWHC has broken the Foreign Corrupt Practices Act, a law that bans the bribing of foreign officials.  In its 10K filing, management stated that, “although we are cooperating fully with the DOJ in this matter and have undertaken a comprehensive review of company policies and procedures, the DOJ may determine that we have violated FCPA laws. We cannot predict when this investigation will be completed or its outcome.”  Generally speaking, it’s prudent to avoid accumulating shares of companies that are victim to a regulatory overhang.  As such, it would probably be wise to wait for more definitive news out of the DOJ or SWHC regarding the alleged FCPA violations before opening up or adding to a position in Smith & Wesson.

Disclosure: No holdings in SWHC.

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