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Dirty Harry’s favourite company poised for growth
Defense Market Report
Exclusively for InvestorIdeas.com
By James Smith
August 25, 2006
The company that Clint Eastwood made famous in the Dirty Harry film looks poised for significant gains, buoyed by military sales.
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The 44-Magnum, “the most powerful handgun in the world”, is made by Smith & Wesson, the largest manufacturer of handguns in the US.
Smith & Wesson has been reinvigorated by new leadership after a bad decade, forging a comeback with the US military.
Smith & Wesson reported that revenues for FY2006 increased 27.4 per cent over the previous fiscal year, driven by business from the federal government, including four orders from the US military for shipment to Afghanistan. One of theses orders was a US$15 million sale of pistols destined for the Afghan National Police. These orders intensified the company’s drive to seek out opportunities with other federal government agencies.
Smith & Wesson is bidding on a contract to supply the US Army with 645,000 of its .45-caliber pistols over a 10-year period. That deal could be worth about US$500 million in revenue, the company’s largest ever military order. Italy's Beretta Holding has the current Army contract, which expires next year.
The company has also restructured its law enforcement sales organization and introduced the Military & Police (M&P) pistol and rifle lines to further penetrate domestic law enforcement markets with a new line of products. Market research indicated that the Smith & Wesson brand could be successfully transferred into new markets, including the long-gun market for tactical rifles, hunting rifles and shotguns. Smith & Wesson responded quickly by introducing its new M&P tactical rifle series in January 2006. Shortly after the new product launch, the company received an initial order from the Las Vegas Police Department.
Smith & Wesson has received commitments for the M&P pistol from about 60 separate law enforcement agencies.
The company also signed three new licensing partners in FY2006 for apparel, gun safes and gun cleaning equipment.
Smith & Wesson also recently moved to the Nasdaq from the American Stock Exchange, a move that will give the company more visibility and allow for a larger volume of trades.
Smith & Wesson has just landed a US$30 million revolving acquisition line of credit with TD Banknorth. The revolver will be available to finance up to 90 per cent of the cost of any acquisition. However, there a no rumours about any company on the Smith & Wesson radar, since its speculated acquisition of Winchester US Repeating Arms failed to materialize.
The company has also filed two shelf registration statements with the US Securities and Exchange Commission.
One registration statement is intended to allow the company to issue and sell -- in one or more public offerings – up to 15 million shares to fund acquisitions, capital expenditures or for other corporate purposes. Based on the August 23 closing price of US$8.54 per share, the sale would add US$128.1 million to the mix.
The company’s 52-week high was US$9.12; the 52-week low was US$3.50.
The other statement would allow the company to issue and sell securities worth up to US$150 million to fund acquisitions.
Smith & Wesson has increased its FY2007 sales guidance to US$180-186 million, which would be a 14-18 per cent increase over FY2006 sales. Net income is now anticipated to be US$12.5-13.5 million, representing a 44-55 per cent increase in net income over FY06.
Michael F Golden, president and chief executive officer of Smith & Wesson, said, "We have previously indicated our intention to expand and diversify our business through strategic acquisitions and alliances. Our expanded credit agreement and these registration statements are intended to assure that we have sufficient resources to take advantage of any opportunities that present themselves. We do not currently have any definitive plans for acquisitions or alliances and have not entered into any letter of intent or other documentation with respect to any such transaction. We also have no current plans to raise additional funds through the public securities markets or through our credit agreement."
With a strong war chest, indications are that Smith & Wesson will make a substantial acquisition within the next two years.
The 154-year old company looks like a good bet, adding credence to the Old West poker adage that a Smith & Wesson beats four aces.
Disclaimer
James Smith is an independent columnist for this web site. James Smith may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment.
InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. James Smith is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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