Concerned With Decelerating Industry Demand For Firearms, Wunderlich Downgrades Smith & Wesson

Following the strong run in Smith & Wesson Holding Corp SWHC over the past few years, Wunderlich’s Rommel Dionisio believes the stock is unlikely to see any meaningful near-term outperformance, especially given the fundamental headwinds.

Dionisio downgraded the rating on the company from Buy to Hold, while lowering the price target from $36 to $29.

The analyst explained that the downgrade was based on the “quickly decelerating demand in the U.S. firearms market, a challenging early start to the key hunting season, and the company’s unexpected elimination from the U.S. military contract.”

Related Link: Record-Setting NICS Data Decelerates, But Still A Positive For Cabela's And Sportsman's Warehouse

Decelerating Demand

The U.S. firearms market saw sharp spikes in during 2015, driven by terrorism-related incidents in San Bernardino and Paris, followed by an over 30 percent spike in June-July 2016, following the Orlando incident.

However, NICS background check data shows significant deceleration in August and September, with year-on-year growth for September only in the high single digits.

Tough Comps

Dionisio believes the industry would likely see unusually tough year-on-year comps, beginning December 2016, and stated, “Considering what may have been pull forward of consumer demand these past several quarters, we believe y/y NICS trends may actually turn negative in upcoming months.”

Going forward, the analyst expects the firearms industry to see a rise in promotions, prior to the annual Shot Show in January 2017. This could potentially pressure margins.

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