Smith & Wesson: A Potential Takeover Target Amid Industry Consolidation

Core Viewpoint - Smith & Wesson (NASDAQ:SWBI) is considered an undervalued company with potential for M&A activity, especially in light of recent interest in its competitor, Vista Outdoor [1][11]. Group 1: M&A Activity and Market Interest - Vista Outdoor is in discussions to sell its gun business to Czechoslovak Group (CSG), a major European defense company with over $180 billion in revenues, indicating strong market interest in gun-related assets [2]. - A bidding war for Vista Outdoor's gun business has emerged, with MNC Capital increasing its bid to $37.5 per share, reflecting the perceived undervaluation of such assets [2]. - Smith & Wesson's fragmented ownership and low valuation make it an attractive target for both private equity and strategic buyers [2]. Group 2: Financial Performance - Smith & Wesson has shown stable revenues, with notable peaks in 2021 and 2022, and strong cash generation, which has exceeded levels from 2018 despite lower revenues [3]. - The company has not engaged in M&A activities recently, opting instead to reinvest cash into the business or return it to shareholders [3]. Group 3: Valuation Metrics - Smith & Wesson's valuation is appealing when compared to competitors like Sturm, Ruger and Vista Outdoor, with various P/E and EV/EBITDA multiples indicating room for re-rating [4][5]. - The current EV/EBITDA multiple for Smith & Wesson is in the mid-range compared to its peers, but it is expected to improve as the market recognizes the brand's resilience and financial performance [5][9]. - Historical M&A transactions in the sector have averaged an EV/EBITDA multiple above 9x, suggesting potential for Smith & Wesson's multiple to increase [6][8]. Group 4: Future Outlook - The potential for a re-rating exists even without a transaction, as the market may adjust the EV/EBITDA multiple upwards, with a target multiple of 9.5x yielding a fair value of around $18 per share [9]. - The company has a strong brand and has previously achieved record EBITDA levels above $300 million in 2021 and 2022, which could be replicated in the future [9].