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Down 25% in Just Over a Month, Is Smith & Wesson Stock a Buy?

My, how the mighty have fallen.

Just a little over a month ago, Smith & Wesson (NASDAQ: SWHC) was enjoying yet another banner election year. With guns in politicians' crosshairs, there was every prospect that panicked gun owners would once again flood into gun stores, with fistfuls of dollars and ready to spend, fearful that a new president would soon try take their guns. Smith & Wesson was riding high in the saddle, until suddenly ...

Pew! Pew! Pew!

Smith & Wesson stock is having a rough April. SWHC Total Return Price data by YCharts.

Three analysts took aim and Smith & Wesson stock tumbled to the ground.

What laid Smith & Wesson low?
According to the analysts -- Cowen and Co.CL King, and BB&T Capital -- new data from the FBI's National Instant Criminal Background Check System showed a 13.2% sequential slide in the number of background checks for handgun purchases between February and March. Background checks for would-be long gun purchasers likewise declined -- down 8%.

This set off a panic of another order entirely, and a stampede out of Smith & Wesson stock, driving the stock's price as low as 25% below its March 14 peak. And it raises an intriguing question for value investors:

Is even a 13% decline in gun sales (which the NICS data seem to imply) enough to justify a 25% decline in stock price?

Valuating Smith & Wesson
A definitive answer to this question may have to wait until June, when Smith & Wesson is next due to report financial results to investors. In the meantime, all we have to work with is historical data. (But honestly, historical data aren't all bad. At the least, they're more reliable than future projections).

So what do these data tell us?

Currently, Smith & Wesson shares sell for 21.6 times trailing earnings. For a stock projected to grow earnings at 15% annually over the next five years, and paying no dividend, that seems a pretty high price. Rival Sturm, Ruger (NYSE: RGR), on the other hand, costs only 20.6 times earnings -- and Sturm, Ruger pays a dividend yield of 2.5%! (On the third hand, Sturm, Ruger is also projected to grow slower than Smith & Wesson.)

On the fourth hand, though (even with the fastest hands in the West, we're fast running out of hands), data from S&P Global Market Intelligence show that over the past 12 months, Smith & Wesson stock generated free cash flow of $131.7 million. That's 64% ahead of reported GAAP income of $80.2 million.

So what's it all add up to? Valued on free cash flow, Smith & Wesson stock sells for just 9.3 times FCF -- which seems cheap for 15% growth. If you're a cash-focused investor like myself, that's an attractive proposition. And with an election still on the horizon, and guns still a hot topic, it might even be an attractive enough valuation to take a flyer on Smith & Wesson stock, and pick up a few shares after their slump.