Is Sturm, Ruger Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Sturm, Ruger (RGR 0.52%) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Sturm, Ruger's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Sturm, Ruger's key statistics:

RGR Total Return Price data by YCharts

Source: YCharts.
*Period begins at end of Q3 2010.

RGR Return on Equity (TTM) data by YCharts

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
Sturm, Ruger comes through with flying colors in its second assessment, earning seven out nine possible passing grades -- the same score it earned last year, when we examined it for the first time. Sturm, Ruger's stock growth has raced ahead of the improvement on its bottom line, and at present, its dividend payouts are too high to be supported by its free cash flow. However, the company has been able to increase its free cash flow levels substantially, which could indicate a return to reasonable payout rates in the near future. This is an outstanding performance all around, but can Sturm, Ruger continue to post impressive growth figures over the next year? Let's dig a little deeper to find out.

Sturm, Ruger has recently reported market-beating third-quarter results amid robust demand for new firearms. Fool contributor Rich Smith points out that Sturm's LC380 and SR45 pistols and Ruger's American Rimfire, which accounted for roughly 32% of total firearm sales over the past nine months, have continued to dampen the prospects of fellow gun maker Smith & Wesson (SWBI 1.66%) and other private manufacturers. However, not long before its third-quarter report, Sturm, Ruger's stock tumbled after sporting-goods retailer Cabela's (CAB) reported a downturn in firearms and ammunition sales. Despite this apparent uncertainty, the company seems highly committed to its shareholders -- CEO Michael Fifer talked about the potential for another special dividend last month, while he has outright rejected any plans for share-repurchase programs, which tend to be poor uses of capital after a large share price run-up.

Fool contributor Mark Lin points out that Sturm, Ruger's decided to minimize its exposure to law enforcement markets, which has been hindered by substantial federal budget cuts over the past few years. This has left a void for TASER to step into -- the stun-gun specialist has been enjoying strong sales of non-lethal weapons and on-officer video solutions, which allow law enforcement agencies to cut down costs associated with citizen complaints and litigation. Consumer-focused Smith & Wesson has also been trying to leverage opportunities in law enforcement, as government agencies still spend between $10 billion and $20 billion on law-enforcement technology each year.

Fool contributor Sean Williams notes that President Obama's proposed gun-violence prevention measures might curb private gun ownership, as they will require more extensive background checks for all gun sales. In addition to this, some politicians have opposed the National Rifle Association's stance on unregulated gun ownership. Despite this pushback, firearms sales have been on the rise, and there appears to be little real political will for a major firearms crackdown.

Sturm, Ruger has enjoyed such brisk demand that it recently opened a new manufacturing facility in North Carolina, which is the gunmaker's first major expansion in 25 years. The company plans to invest more than $26 million into the plant by the end of 2017. Sturm, Ruger's expanded product lines should be able to drive greater demand among gun owners willing to pay a premium for superior quality.

Putting the pieces together
Today, Sturm, Ruger has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.