S&W may not be in quite such bad shape as first thought

There are signs that Smith & Wesson’s profits will remain under pressure. With demand soft, the company’s inventory has continued to rise. At the end of October, it held $99 million in inventory, up from $76 million at the same time a year earlier.

The company also said it plans to offer “aggressive promotions” in coming months to protect market share. It acknowledged that gross margins could take a hit as a result.

Unfortunately, margins are already looking depressed. Gross margin for the quarter was 32.1 percent, the lowest level since the quarter ended in January 2012.

via Gun lovers leaving Smith & Wesson for dead?.

I’ve mentioned before that my day job consists of managing IT for an investment manager. And it was just a week or two back that I overheard the conference call in which S&W discussed their current financial status. News of S&W’s financial “difficulties” set the ears of the financial world’s liberals ablaze. This of course includes the network that carries Michael Bloomberg’s name as well as a branch of MSNBC known as CNBC. And we mentioned it this in last Sunday’s podcast. Robert Farago also covered it on The Truth About Guns. But, since then I’ve had a chance to sit down and talk with one of my co-workers. A guy much smarter than me who recently took over managing our equity portfolios. We’ll call him Cranky Curmudgeon.

Cranky tells me that as he looks at S&W’s public filings, the picture isn’t quite so bleak. While the firm has taken on $100 million plus in debt as part of their recent acquisition of Battenfeld Technologies (think Caldwell Shooting Suppplies, Frankford Arsenal, or Golden Rod Moisture Control), Cranky says there’s currently no significant financial strain on the company.

Sales are down and inventories are up but, with respect to debt, or servicing that debt, current revenues more than cover it. More specifically, the company has done something that is not at all unusual for corporations in that they’ve effectively kicked the rock of paying off debts due in 2015, down the road to 2017. Corporate types might call it cash flow and debt management. It’s one of those things us normal folk can’t do. It’s all a bit more complicated than anything I’m prepared to explain but, the bottom line is, S&W, at least in Cranky’s eyes, isn’t going anywhere and they are in a far better situation than many energy companies right now. In fact, it may soon be a time to buy S&W since the stock price has fallen to around $9/share from a high of $17 or so back in June. One rule never seems to change in the investment industry…Buy low, sell high.

-GM

P.S. I am just an IT guy and a shooter. Please don’t confuse my musings and commentary above as investment advice. That’s not my job. Talk to your CFA certified investment professional about investing. Talk to me about guns. I like S&W. I’ll continue buying their guns. I’ll let “Cranky” manage my money.

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