RGR Total Return Price Chart

Sturm, Ruger stock has had a good run lately; but it may be coming to an end. RGR Total Return Price data by YCharts.

When gunsmith Sturm, Ruger (RGR -2.25%) reported a big earnings beat, and a "meet" on revenues, Tuesday night, you might have expected investors would reward Sturm, Ruger stock with a big bump in share price. That's not what's happening, though.

Instead, Sturm shares were off a good 3% in early Wednesday trading, as investors got their first chance to react to the earnings news with buy and sell decisions. Are you curious to find out why?

So were we, and so we took a quick look at the results. Here's what we found:

  • Fiscal second-quarter 2015 sales at Ruger came in at $140.9 million, down more than 8% from last year's Q2, but level with analyst expectations.
  • Earnings, in contrast, came in strong at $0.91 per diluted share -- down 19% year over year, but not as bad as the $0.78 per-share profit that analysts had warned us was all Ruger might earn.
  • Best of all, cash flow came a-gusher in Q2, with operating cash flow more than doubling Q2's haul, at $48.1 million, capital spending declining to $12 million, and free cash flow surging to $36.1 million for the quarter in consequence.

And that is very good news, indeed.

It means that, despite sporting GAAP financials that show net income at Ruger today barely edging over $25 million, according to S&P Capital IQ, the company is actually producing cash profits of nearly $62 million annually. These are better numbers than we've seen at Sturm, Ruger for years -- better even than the $60 million in free cash flow generated in 2012. Based on these numbers, Sturm, Ruger stock is trading for just 17.4 times trailing free cash flow today.

And now for the bad news
The bad news is 17.4 times FCF. That would seem to be a very attractive valuation for a strongly growing stock paying a modest 2.2% dividend, except for one small detail: While Sturm, Ruger has the dividend nailed down, it's not growing strongly at all.

Rather, as noted above, both sales and earnings are in the decline at this gunmaker. And while analysts expect to see that trend turn around in future years, right now, the most Wall Street is expecting to see out of Sturm, Ruger is 5% annualized profits growth during the next five years.

Worse, Sturm, Ruger warned investors that, although it managed to grow sales sequentially between Q1 and Q2 of this year, "sell-through of the Company's products from ... independent distributors to retailers decreased 22% from the first quarter of 2015," and "National Instant Criminal Background Check System background checks ... decreased 21% during the same period." All of this suggests that there's a lot of slack left in the firearms market, and any strong rebound in demand for Sturm's products -- and its profits -- could be some time in coming.

Long story short: A cheap stock, when paired with lousy prospects, suggests investors are right to be taking profits after Sturm, Ruger stock's recent strong run. Sturm, Ruger shares are down this week, but they could get even cheaper in the weeks to come.

(P.S. While you wait to see how the Sturm, Ruger story plays out, here are a couple more guns stocks you might consider.)