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Is Smith & Wesson Destined for Greatness?

http://www.fool.com/investing/general/2013/03/22/is-smith-wesson-destined-for-greatness.aspx

Alex Planes
March 22, 2013

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 (NASDAQ: SWHC) 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 Chart

Source: SWHC Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

34.0%

Pass

Improving profit margin

212.3%

Pass

Free cash flow growth > Net income growth

111.7% vs. 77.2%

Pass

Improving EPS

57.1%

Pass

Stock growth (+ 15%) < EPS growth

136.1% vs. 57.1%

Fail

Source: YCharts. * Period begins at end of Q4 2009 (Jan. 28, 2010).

SWHC Return on Equity Chart

Source: SWHC Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

43.6%

Pass

Declining debt to equity

(45.8%)

Pass

Source: YCharts. * Period begins at end of Q4 2009 (Jan. 28, 2010).

How we got here and where we're going
Smith & Wesson misses out on a perfect score as a result of its share price growing faster than the underlying earnings per share. However, it's hard to argue with a single-digit P/E -- Smith & Wesson's is 9.7 as of this writing -- and the rest of the company's results are pretty sterling. The question is: Will everything continue to move in the right direction?

Smith & Wesson's come a long way from its history as the gun maker behind America's first revolvers, but in recent years its financial progress has been surpassed by that of fellow gun maker Sturm, Ruger (NYSE: RGR), which has a fast-growing dividend and is also debt-free. Both companies have seen their fortunes soar in the past few years. Whether you wish to attribute it to hoarding over fears of gun control, reactions to a dangerous world, or simply rising interest in recreational shooting, the results are obvious on the bottom line: It may never be a better time to be a gun maker.

However, the best time to be a gun maker may already be past. Despite a recent rejection of assault-rifle bans in Congress, a number of high-ranking politicians have pushed back hard agai