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 (NYSE:RGR) 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.

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.