America's biggest gunsmith, Sturm, Ruger (RGR 0.09%) reported its fourth-quarter and full-year earnings last night, admitting to its first "earnings miss" in four years.

Ruger's ever-popular "pocket pistol," the .380 Ruger LCP. Photo: Ruger.

Q4 earnings came in at $1.33 per share, or 33% better than the $1 a share Sturm earned one year ago. Nonetheless, these earnings missed analyst estimates by a nickel, and investors are not pleased, selling off Sturm stock to the tune of 11% in early Wednesday trading. Is this an overreaction? Let's find out.

In 2013, Sturm Ruger:

  • Gained market share, with unit sales (from distributors to retailers) growing 18% in a market where NICS background checks (a proxy for gun sales) grew only 7%.
  • Achieved 40% sales growth by dollar value in 2013 -- $688 million.
  • Grew net profits by 58%, and earnings per share 55%, to $5.58 per diluted share.

So far, so good. But not all the news was so good. Among the downsides to Sturm's report is the fact that, for instance, the company's dividend payout is proving highly volatile -- nigh unreliable.

After paying out an astonishing $5.80 in dividends to its shareholders in 2012, Sturm wrapped up 2013 with only $2.12 in dividend payouts. Both numbers were much higher than the firm's $0.43 in dividends paid in 2011, granted. But the fact that Sturm's dividend jumps around so much is one reason the stock may lack support among dividend-hungry investors. If you can't count on a consistent payout from Sturm, and if its earnings are subject to shocks such as we saw last night -- why stick around for the next surprise?

A second issue that may be nagging investors: Despite its superb GAAP earnings, Sturm's production of real cash profits remains subpar. Free cash flow generated in 2013 amounted to only $65.1 million -- less than a 9% increase over 2012 levels.

Result: At a P/E ratio of less than 11 when valued on its GAAP "earnings," Sturm, Ruger looks more expensive than rival Smith & Wesson. Valued on the cash profits it's actually earning, though, Sturm carries a much bigger price tag than meets the eye: 18 times FCF.

Foolish takeaway
Given the unreliability of Sturm's dividend yield, whether that's a good price or a bad price depends largely on how fast you think the company will grow. Yahoo! Finance, sadly, provides no analyst estimate for Sturm's future growth rate. S&P Capital IQ is a bit more helpful, citing one single analyst who postulates a 13.5% growth rate -- which seems too low to support an 18 times multiple on the stock. Meanwhile, Sturm just showed us that in some years, at least, it's entirely capable of growing even slower than that.

If investors are upset with these kinds of numbers, they've got good reason to be.