Smith & Wesson Stock Getting Killed By This Research

BB&T Capital downgraded gun maker Smith & Wesson Holding Corp (NASDAQ: SWHC) to Hold from Buy, citing limited sales upside in the near-term due to lack of internal inventory. The brokerage also noted the recent insider activity suggests that the shares have limited upside potential from current levels.

"As a result of increased consumer demand, SWHC was stripped off its majority inventory. While the company continues to try to maintain pace with the increased demand, it has been forced to rely more heavily on outsourced production," analyst Brian Ruttenbur wrote in a note.

"The company's internal inventory was reduced to $76M at the end of FQ3'16 (December) from $101M in FQ2'16 (September). The company's finished goods inventory stood at $27.6M at the end of FQ3'16. We believe SWHC's increased use of outsourced production will limit its sales and margin upside in the near-term."

The analyst, citing FactSet data, said the net insider position has been reduced by about 269,000 shares in the past three months.

"We see this insider activity as an indication of full share valuation and limited upside potential," Ruttenbur said.

"SWHC shares closed Friday at $27.76, roughly 7.5% from our prior target of$30. Shares of SWHC are trading slightly below its publicly traded peers, which we believe is fair given the limited growth potential on the top and bottom line," the analyst noted.

"We believe industry growth rate may be slowing, indicated by March's NICS data yr/yr growth rate of 9.2% vs February of 16.2%, January of 29.5%, and December of 37.6%. We continue to expect yr/yr growth through the end of May given easy yr/yr comps, but believe the 20%+ growth levels are less likely through the end of the year (barring unforeseen catalysts)," Ruttenbur added.

The stock was also downgraded at Cowen to Market Perform from Outperform, while CL King cut the rating to Neutral from Buy.

Shares of Smith & Wesson plunged 16 percent to $23.26. Year-to-date, they have gained 6 percent.