Is Smith & Wesson Holding Corp 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 Smith & Wesson (SWBI 0.47%) fit the bill? Let's take a 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 Smith & Wesson'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 take a look at Smith & Wesson's key statistics:

SWHC Total Return Price data by YCharts.

Source: YCharts. *Period begins at end of Q1 2011.

SWHC Return on Equity (TTM) data by YCharts.

Source: YCharts. *Period begins at end of Q1 2011.

How we got here and where we're going
Smith & Wesson's performance has almost held up since we first examined it last year, as the gun maker finished with a strong five out of seven possible passing grades in its second assessment, down one passing grade from 2013. The one new falling grade only occurred because Smith & Wesson's net income growth has shot past the growth of its free cash flow; but for the second year in a row, the company's share-price gains have advanced beyond its EPS growth during our three-year tracking period. Will Smith & Wesson be able to grow both earnings per share and free cash flow at the rates necessary to earn a rare perfect next time around? Let's dig a little deeper to find out.

Smith & Wesson investors have enjoyed one of the market's best share-price growth rates during the past few years, as the company has been trouncing Wall Street's expectations for revenue and earnings per share since nearly the start of our three-year tracking period. The company recently outperformed analyst projections for both its top and bottom lines in its fiscal fourth quarter, which, as always, is primarily due to the spike in sales that seems to occur every time political commentators begin muttering about the imminence of tighter gun regulations in the United States.

However, Smith & Wesson's downbeat guidance for fiscal 2015 has finally given investors some reasons to be skeptical about its potential, because this is the first time in a while that the company has produced such underwhelming estimates. Despite these near-term challenges, Smith & Wesson's management still expects revenue to grow by between 8% and 10% over a longer timeline, as the company's sterling brand could help snatch market share from other gun manufacturers in a tighter sales environment. My fellow Fool writer Dan Caplinger notes that Smith & Wesson ought to be able to outperform fellow gun maker Sturm, Ruger if demand for firearms returns to more normal levels.

On the other hand, decreasing background-check volumes and weakening sales at sporting-goods retailers have raised concerns that gun demand might have already peaked. Alliant Techsystems has recently spun off its firearms and sporting-goods business to insulate its core operations from this unwelcome trend. Despite this potential headwind, Wedbush analyst Rommel Dionisio recently upgraded Smith & Wesson to buy from hold, and raised his price target to $20 from $13, citing humongous upside for Smith & Wesson's recent handgun launches, including the M&P Bodyguard 380, which has fared well in jurisdictions permitting small-frame/concealed-carry pistols and revolvers.

According to a new Harris Poll, the firearms restrictions are supported by more than three-quarters of Americans, which could produce stricter gun legislation in the U.S. However, fear of restrictive gun legislation has been an easy bogeyman that the industry has thus far used to send its customer base scurrying to gun stores. Barring a much firmer commitment to reform on Capitol Hill, Smith & Wesson's growth should be reasonably secure for the upcoming quarters. With shares currently trading at a low forward P/E ratio of 10, there are still plenty of viable opportunities to bet on Smith & Wesson's continued momentum.

Putting the pieces together
Today, Smith & Wesson 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.