Stock Sonar #24 - 9/13/2023

Smith & Wesson (NAS:SWBI) — mrkt cap $527mm; Price $11.41; trailing P/E 14

STARTER POSITION INITIATED. We spoke with Deana McPherson, Smith & Wesson’s long-time CFO, late last year and opted not to invest in the company. Although NICS figures (indication of demand) were high, there were bloated levels of channel inventory and the company had only spent $20mm of the planned $125mm for its large relocation from Massachusetts to Tennessee. Fast forward to today, although the stock price is higher by 30%, channel inventory is down 35% and the company is close to completion on its relocation (grand opening is Oct 7th), significantly de-risking the investment prospects. We believe in the strength of Smith & Wesson’s brand and the favorable long-term supply/demand dynamics of the gun industry. The company is trading at 14x p/e but this is off a low TTM earnings figure given the expenses related to relocation. On a normalized FCF basis, the company trades at 8x and given their shareholder friendly orientation, this is enough for us to initiate a starter position.

Broadwind (NAS:BWEN) — mrkt cap $88mm; Price $4.15; trailing P/E 22

EXITED. We recently closed out our position in BWEN for a marginal gain (we initiated a small position in our stock sonar on 7/12/2023). We were initially attracted to the name given the tailwinds of the wind industry as renewable energy funding increased gross margins (through AMP tax credits) and manufacturing efficiencies increased wind energy economics. Although gross margins have recently improved, BWEN still has another plant (it has two plants total) operating at low capacity rates given the lack of power distribution in that geographic region along with a more arduous permitting process. It will likely stay this way for the foreseeable future.  BWEN also will not benefit from BABA requirements as its competitors are other large domestic players such as Arcosa.

E-ink (TT:8069) — mrkt cap NT$196B; Price NT$172; trailing P/E 25

PASS. Along with TSMC, Taiwan is home to another monopoly: E ink. If you have ever held an e-reader or looked at digital signage, E-ink technology is behind those devices. Putting it simply, E-ink creates microfluid capsules that, whenever an electric current runs through them, can display a variety of colors. The primary advantage of E Ink over LCD displays is its minimal power consumption; e-readers can operate for nearly a month on a single charge, and some digital signages can last for years. Although the E-reader market has reached maturation, the digital signage market is inflecting, with electronic shelf labels in retailers being a primary example. Although run by a capable management team, for a larger and more mature company, E-ink is trading at a steep earnings multiple and we will wait for a better entry point.

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