The stock of Smith & Wesson Brands (NAS:SWBI, 30-year Financials) shows every sign of being significantly 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 $20.455 per share and the market cap of $1.1 billion, Smith & Wesson Brands stock is believed to be significantly overvalued. GF Value for Smith & Wesson Brands is shown in the chart below.
Because Smith & Wesson Brands is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Smith & Wesson Brands has a cash-to-debt ratio of 1.44, which ranks in the middle range of the companies in Aerospace & Defense industry. Based on this, GuruFocus ranks Smith & Wesson Brands's financial strength as 8 out of 10, suggesting strong balance sheet. 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:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Smith & Wesson Brands is -8.1%, which ranks worse than 75% of the companies in Aerospace & Defense industry. The 3-year average EBITDA growth is -72%, which ranks in the bottom 10% of the companies in Aerospace & Defense industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Smith & Wesson Brands's ROIC is 37.80 while its WACC came in at 6.53. The historical ROIC vs WACC comparison of Smith & Wesson Brands is shown below:
In closing, The stock of Smith & Wesson Brands (NAS:SWBI, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is strong 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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