Is Huntsman Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's look at what Huntsman's (HUN -1.33%) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Huntsman's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Huntsman's free cash flow has grown in comparison with its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Huntsman's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Huntsman managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Huntsman's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Huntsman's key statistics:

HUN Total Return Price data by YCharts.

Source: YCharts.
*Period begins at end of Q3 2009.

HUN Return on Equity data by YCharts.

Source: YCharts.
*Period begins at end of Q3 2009.

How we got here and where we're going
With only four of a possible nine passing grades, Huntsman is hardly on the path to perfection. Weakened earnings and free cash flow drag the company's score down, but what's left has been more than enough to pay down debt and sustain a flat dividend for three years. Can Huntsman soon move into positive territory? Let's take a look.

Huntsman's latest earnings were impressive, part of a broader chemicals-industry resurgence that's helped pull Dow Chemical (DOW), LyondellBasell (LYB -1.09%), and Westlake Chemical (WLK -1.02%) higher as well.

One recent problem-slash-opportunity in the chemicals industry has been titanium dioxide, which is used in a wide variety of products, particularly paint. Huntsman, DuPont (DD), and Kronos Worldwide (KRO -2.07%), as the three largest producers of titanium dioxide, have all benefited in recent years from tighter supplies and higher prices -- but there are signs that this cost imbalance may be drawing to a close, to producers' detriments. The forecast is for titanium dioxide prices to rise into 2015. As Fool contributor Keith Speights points out with that forecast, both chemical innovation from Dow and the risk of price fatigue could undermine this upward projection.

Another move in favor of Huntsman and its chemical peers is a recent IRS decision affirming the possibility of spinning off its processing facilities into master limited partnerships. Fool columnist Dan Caplinger has the inside scoop on this move, which could help Huntsman reduce its tax burdens, and offer shareholders a high-yielding new stock to boot.

Overall, Huntsman appears to have more opportunities than risks ahead of it. Its investments in natural-gas-sourced chemicals should pay off as long as prices remain low. Its leading role in titanium dioxide production is still far more an asset than a liability. Other segments, particularly polyurethanes, enjoy leading positions in their markets. However, weakened European demand and the threat of an Asian recession put significant portions of Huntsman's revenue stream at risk. The global economy may be the difference between a Huntsman with a perfect score and one that loses points on its next go-around.

Putting the pieces together
Today, Huntsman has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.