Please ensure Javascript is enabled for purposes of website accessibility

Sturm, Ruger Stock Explodes (in a Good Way)

By Rich Smith - May 7, 2016 at 10:27AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

But how much longer can the good times keep rolling?

Available in more than a dozen color, style, and option configurations, Ruger's compact LC9 semiautomatic pistol was a big contributor to Q1 profits. Image source: Sturm, Ruger.

Gunsmith Sturm, Ruger (RGR 2.78%) reported fiscal Q1 2016 earnings on Monday -- and the news was quite simply fantastic. As good as investors were expecting Sturm's report to be, when the numbers finally came out, they were far better than anyone had hoped -- and sent Sturm, Ruger stock soaring 5.5% Monday, then a further 1.5% yesterday.

The news
Here's how the news went down:

  • Q1 2016 sales jumped 26% to $173.1 million (analysts had been expecting only $147.4 million).
  • Ruger's operating profit margin expanded 230 basis points to 21%.
  • Its net profit margins grew 220 basis points to 13.5%.
  • On the bottom line, Ruger earned $1.21 per share in profits, 50% more than last year.

Immediately deciding to share the wealth, Sturm, Ruger management declared a 40% dividend on these profits, promising to pay shareholders $0.48 per share.

The specifics
Sturm, Ruger stock benefited from the popularity of several firearms in particular, according to management, including both long guns (the "Precision Rifle" and AR-556 modern sporting rifle), and handguns (the American Pistol and LC9 semiautomatics). Each of these firearms was introduced within the last two years, and Ruger noted that such "new products" made up 29% of its sales in the quarter.

With weapons flying off the shelves, Ruger noted that its inventory of finished goods dropped by 14,600 units. Distributor inventories declined by 54,300 units in the quarter. More importantly for investors, with all of this inventory being converted into cash, Ruger generated positive free cash flow of $23.1 million in the quarter, which equated to about 99% of reported net income -- but it was down 19% from Q1 2015.

Despite the decline in free cash flow, Sturm, Ruger stock now sports trailing free cash flow of $78.5 million for the past 12 months, comfortably ahead of reported net income of $69.9 million. Valued on earnings, the stock sells for an 18.6 P/E ratio. Valued on cash profits, it costs 16.6 times free cash flow. Are those prices cheap or expensive?

It depends.

If Ruger succeeds in continuing to grow its profits at anything like the pace set in Q1, Sturm, Ruger stock would clearly be remarkably cheap. In fact, though, according to estimates relayed by S&P Global Market Intelligence, the few analysts who follow this stock are only expecting to see profits rise about 5% annually over the next five years -- Q1's success notwithstanding. Even with dividend yields now averaging 2.5% annually, that growth is probably too slow to support Sturm, Ruger's current valuation. Accordingly, despite the stock performing so well in Q1, I'm not optimistic about it going forward.

In fact, if you ask me, right now looks like a very nice time to cash in on Q1's success -- and cash out of Sturm, Ruger.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sturm, Ruger & Company, Inc. Stock Quote
Sturm, Ruger & Company, Inc.
$66.10 (2.78%) $1.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.