Last month, an offhand comment from Vista Outdoor (NYSE:VSTO) CEO Mark DeYoung gave hope to investors in American Outdoor Brands (NASDAQ:SWBI) and Sturm, Ruger (NYSE:RGR) investors.

Vista, you see, had just got done reporting a massive $449 million charge to earnings, necessitated by miserable sales within its hunting and shooting accessories business. However, DeYoung attributed this shortfall to consumers preferring "certain firearms platforms outside the company's firearms offerings" over wares manufactured by Vista Outdoor. This comment made it sound as if it was at least possible that Vista's losses might turn out to be gains (in market share) for American Outdoor and Sturm, Ruger.

The result: Vista stock suffered an immediate 22% loss in market cap after earnings last month. But Sturm, Ruger stock actually went up after Vista's report, and remained up after its own report on Feb. 22, and American Outdoor Brands sagged only a couple of percentage points.

Firing squad.

Vista Outdoor stock got taken out and shot after earnings -- so why is American Outdoor stock getting an investorial pardon? Image source: Getty Images.

Of course, all of that changed on March 2, when American Outdoor reported its own earnings.

The news

How bad was the news at American Outdoor? At first glance, not too awfully bad -- but it soon got worse. Let us break it down for you. In fiscal Q3 2017:

  • Quarterly sales grew 11% to $233.5 million.
  • Gross margin expanded 140 basis points to 42.5%.
  • Earnings, however, inched up only 2% to $0.57 per diluted share.

So far, so good. But here's where the news turns bad -- terribly, horribly bad, and not very good besides. In Q3, says American Outdoor CEO James Debney, "consumer firearm purchasing began to cool ... toward the end of the quarter," once it became apparent that Donald Trump had won the U.S. presidential election and Hilary Clinton would not, in fact, be coming to take away everybody's guns.

The result: While top-line sales growth appeared fairly strong in Q3, Debney pointed out that more than half the sales growth American Outdoor enjoyed last quarter was of the "inorganic" variety, derived from acquisitions of complementary businesses Taylor Brands (knives), Crimson Trace Corporation (laser sights), and UST (camping equipment).

What comes next

Multiple analysts have weighed in on American Outdoor's results since the news came out, with most of them opining that firearms retailers stocked up big time on guns in anticipation of a Clinton victory in November, and now must work their way through piles of unsold inventory before sales can have any chance of growing again. That's obviously not good news for American Outdoor's business. Still, when it comes to American Outdoor stock, the future still looks propitious.

With the stock priced at less than eight times trailing earnings today, analysts still see profits growing at better than 12% at American Outdoor over the next five years. Meanwhile, from the perspective of free cash flow, American Outdoor stock looks even cheaper, selling for a multiple of only 6.4 times FCF. (For comparison, rival Sturm, Ruger's multiples are 10 times earnings and 12.5 times FCF -- making Sturm the pricier stock.)

Granted, things could easily get worse before they get better. Sales growth could stall, and American Outdoor's profit margins could contract as it cuts prices to clear inventory. But over the long term, if those growth projections hold true, it's hard to see how investors buying at today's low prices could fail to make a profit off this stock -- eventually. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.