SWHC Total Return Price Chart

Smith & Wesson stock has climbed high this year -- and could have more room to run. SWHC total return price data by YCharts.

Gunmaker Smith & Wesson (NASDAQ:AOBC) reported fiscal first-quarter 2016 earnings last week -- and the crowd went wild. After-hours trading post-earnings saw S&W shares surge 6.2%, which, on top of the shares' 1.7% run-up during ordinary trading hours, brought the stock to within a whisker of an 8% gain for the day.

Was it justified? That's what we're here to find out, so let's begin with the highlights.

On Thursday, S&W reported:

  • Net sales of $147.8 million, up 12% from fiscal first-quarter 2015 and 3.5% ahead of Wall Street estimates.
  • Gross margins expanded by a good 260 basis points, rising to 39.8%.
  • Operating costs -- from R&D investments to simple selling, general, and administrative costs -- surged alongside sales, holding operating profit margin gains to just 70 basis points. But that was still an improvement.
  • A raft of one-time charges, however, prevented all this good news from filtering down to the bottom line. Net profit for the quarter actually lagged last year's first-quarter number slightly, and per-share profits were flat year over year at $0.26.

Perhaps the best news of all was the improvement in free cash flow. While S&W is still not generating anywhere near as much cash from its business as its income statement suggests, operating cash flow was still up 54% year over year, while capital spending was down 46%. Result: Whereas one year ago S&W was running free cash flow-negative -- burning cash even as it reported strong GAAP profits -- this time around, S&W generated an honest-to-goodness cash profit. Free cash flow for the quarter came to $8.7 million.

Commenting on the results, CEO James Debney said S&W's sales and profits both "exceeded our expectations," with M&P15 Sport rifles, Thompson/Center Arms bolt-action rifles, and M&P Shield polymer pistols all being strong sellers in the quarter. Based on the strong first-quarter results, management is also tweaking its guidance for the current fiscal second quarter and for the full fiscal year.

This quarter, management expects to earn between $0.16 and $0.18 per share on anywhere from $135 million to $140 million in sales. By year-end, S&W says it should have earned between $0.99 and $1.04 per share and booked between $610 million and $620 million in sales.

Valuation
Assuming this is how things play out, Smith & Wesson, which earned $0.90 per share last year and $0.90 over the past 12 months as well, will grow earnings 10% to 15% this year. Its P/E ratio, currently at 18 based on trailing results, will accordingly fall to just 15.6.

That's not a half-bad price for a near-term 15% grower, even without a dividend. The stock looks even more attractive when you consider that free cash flow at Smith & Wesson, according to data from S&P Capital IQ, now shows an even $100 million generated over the past year. At an enterprise value of just over $1 billion, that makes for an EV/FCF ratio of just 10 -- a fair price even if Smith & Wesson grows profits no faster than 10% annually over the next five years. Meanwhile, analysts who follow the stock continue to project long-term earnings growth of 14%.

Long story short: You can comfortably go long on this stock.