– By GF Value
The stock of Smith & Wesson Brands (NAS:SWBI, 30-year Financials) gives every indication of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $18.39 per share and the market cap of $979.3 million, Smith & Wesson Brands stock shows every sign of being modestly overvalued. GF Value for Smith & Wesson Brands is shown in the chart below.
Because Smith & Wesson Brands is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Smith & Wesson Brands has a cash-to-debt ratio of 1.44, which is better than 67% of the companies in Aerospace & Defense industry. GuruFocus ranks the overall financial strength of Smith & Wesson Brands at 7 out of 10, which indicates that the financial strength of Smith & Wesson Brands is fair. This is the debt and cash of Smith & Wesson Brands over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Smith & Wesson Brands has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $1.1 billion and earnings of $1.7 a share. Its operating margin is 21.38%, which ranks better than 89% of the companies in Aerospace & Defense industry. Overall, GuruFocus ranks the profitability of Smith & Wesson Brands at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Smith & Wesson Brands over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company’s revenue and earnings are declining, the value of the company will decrease. Smith & Wesson Brands’s 3-year average revenue growth rate is worse than 76% of the companies in Aerospace & Defense industry. Smith & Wesson Brands’s 3-year average EBITDA growth rate is -72%, which ranks in the bottom 10% of the companies in Aerospace & Defense industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Smith & Wesson Brands’s return on invested capital is 37.80, and its cost of capital is 6.73. The historical ROIC vs WACC comparison of Smith & Wesson Brands is shown below:
In summary, the stock of Smith & Wesson Brands (NAS:SWBI, 30-year Financials) gives every indication of being modestly overvalued. The company’s financial condition is fair and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Aerospace & Defense industry. To learn more about Smith & Wesson Brands stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.