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Why Smith & Wesson Brands Is Rebounding This Week

The Motley Fool logo The Motley Fool 12/10/2021 Rich Duprey
Why Smith & Wesson Brands Is Rebounding This Week © Provided by The Motley Fool Why Smith & Wesson Brands Is Rebounding This Week

What happened

Shares of Smith & Wesson Brands (NASDAQ: SWBI) are up by 12.4% compared to where they closed last Friday, according to data from S&P Global Market Intelligence, recovering somewhat from the sell-off that followed the release of its lackluster fiscal second-quarter earnings report.

The gunmaker's stock plunged by 30% after it missed Wall Street's top- and bottom-line estimates by a wide margin, but the market may have concluded that the sell-off was overdone considering the latent demand for firearms that remains. Management also stood by its full-year guidance for gross margin and earnings before interest, taxes, depreciation, and amortization (EBITDA).

Woman receiving handgun instruction at the range © Getty Images Woman receiving handgun instruction at the range

So what

It's clear the firearms market isn't experiencing the same conditions as it was a year ago. That period featured a confluence of events that included the start of a pandemic, civil unrest, an extremely contentious presidential election, and an industry that was low on inventory. That's not a combination likely to be repeated.

Yet demand for firearms has not abated. The FBI reports the number of criminal background checks it is conducting on would-be gun buyers is virtually the same as it was a year ago, and even after the National Shooting Sports Foundation adjusts that raw data to take into account checks on people with existing concealed weapon carry permits, background checks remain elevated. 2021 is likely to end as the second biggest year for the gun industry.


Video: Strong earnings continue to drive market gains (Yahoo! Finance)

Replay Video

For the industry, the main difference between conditions now and conditions a year ago is that distributors now have plenty of inventory. Smith & Wesson estimates there is about 15 weeks worth of stock at its distributors, which is a positive development because it ensures they will be able to meet any spike in demand. Yet it also means the gunmaker's coming fiscal third-quarter report isn't going to be anything like last year's

Now what

Recent reports show 12 major U.S. cities including Philadelphia, Indianapolis, Austin, Portland, and Louisville, have all broken their annual homicide records in 2021. Those peaks reflect a rising trend that began last year. The FBI reports there was a 30% increase in the murder rate in 2020, the sharpest one-year rise in that statistic in the 60 years the law-enforcement agency has been tracking it.

Experts say there is no single reason driving the spike in violence, but for now, there remains plenty of demand for guns, and therefore opportunities for Smith & Wesson Brands and other gun manufacturers to grow sales.

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Rich Duprey owns Smith & Wesson Brands, Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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