Smith & Wesson Holding Corp. (NASDAQ:SWHC) Q2 Earnings Preview: Gonna Fire Blank Guidance?

Smith & Wesson Holding Corp. (NASDAQ:SWHC) plans to release its second quarter fiscal 2014 financial results on Tuesday, December 10, after the close of the market. Management will host an analyst conference call that may include forward-looking statements. The conference call will be webcast live and is scheduled to begin at 5:00 p.m. Eastern Time.

Wall Street anticipates that the gun maker will earn $0.21 per share for the quarter. iStock expects SWHC to meet Wall Street’s consensus number. The iEstimate is $0.21, too.

Smith & Wesson Holding Corporation engages in the manufacture and sale of firearm products in the United States and internationally. It offers firearms; handguns, including revolvers and pistols; long guns, such as sporting, bolt action, and single shot rifles; hunting rifles; black powder firearms; handcuffs and restraints; and firearm-related products and accessories.

If Smith & Wesson does hit the consensus target, it will break a streak of eight consecutive bullish EPS surprises. In the last two-years, the bottom line exceeded expectations by a range of $0.01 to $0.10 with an average of $0.05 more that Wall Street’s outlook.

Shareholders reaped substantial EPS-driven profits in the last eight announcements. SWHC popped six of the eight by an average of 19.42% in the three-days surrounding the quarterly checkup. However, things have slowed done as of late. The stock has dropped two of the last four with returns of -2.8%, 1.1%, 2.3%, and -5.9% for the last four quarters, from the most recent.

After record setting sales in 2011 and 2012, gun background checks dropped year-over-year (YoY) and slipped 1.99% during Smith and Wesson’s second quarter, according to FBI statistics. Forward guidance could be suspect, too, as Black-Friday FBI checks declined 6.5%; although, it was still the fifth best Black-Friday ever. All-in-all, 2013 November checks dropped to 1.81 million from 2.01 million in 2012.

If background checks mirror sales, and there should be a high correlation, then Smith & Wesson could earn $0.23 to $0.24, which accounts for the 1.99% dip in records and would make for the ninth straight bullish surprise.

We see an even bigger decline in search volume intensity using Google Trends. YoY, the number of queries slid 16.67%, which would make for EPS of $0.20 – a penny less than the consensus.

Whether management can find the extra penny or two will depend on margins. In the last quarter’s 10-Q we find that sales grew at 25.75% while the cost of goods sold increased at a slower pace of 15.90%, which is good. A little further down the income statement we find operating expenses were in line with sales; however, general and administrative expenses jumped 32.98%. Nothing else that we see in the financial statement is worrisome.

Overall: Smith & Wesson Holding Corp. (NASDAQ:SWHC) EPS range for Tuesday afternoon is $0.20 to $0.24, which means there is a greater chance for a bullish surprise surprise than a disappointment. However, weak Black-Friday background checks could result in tepid forward guidance and put pressure on SWHC shares. We’d be cautious trading Smith & Wesson’s EPS announcement.