Is Checkpoint Systems Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Checkpoint Systems (CKP.DL) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Checkpoint's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Checkpoint's key statistics:

CKP Total Return Price data by YCharts.

Source: YCharts.
*Period begins at end of Q2 2010.

CKP Return on Equity data by YCharts.

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
Checkpoint musters only one out of seven possible passing grades, and even that lone pass was granted more on technicality than a genuine improvement. Nothing has moved in the right direction. Revenue is down, but net income is down to a greater degree. The only thing that's up is the one thing that shouldn't be: debt! In theory, things can't possibly get much worse, but reality could be a harsh mistress. Is there any hope left for Checkpoint today?

In its second quarter results, Checkpoint beat analyst expectations on revenue, but missed on net income. That's the third quarter out of its past four that Checkpoint has reported underwhelming bottom-line numbers; no wonder its net income figures have tanked recently. Checkpoint has recently agreed to sell its U.S. and Canadian CheckView business to a private-equity firm, Platinum Equity, which is likely an effort to replenish the coffers while trimming the fat -- cash and equivalents have declined by a quarter in our traced period to roughly $120 million. Checkpoint is now going through extensive restructuring, and it will continue to divest non-profitable businesses like video monitors and alarm systems.

In the beginning of this year, Checkpoint appointed George Babich as permanent CEO. My Foolish colleague Rich Smith notes that Babich has been integral to Checkpoint's strategic streamlining efforts. During his "interim" tenure, the company's revenues have grown by 16%, while quarterly losses are half what they were before he took over. So far, Babich has obviously continued to pursue the same strategy, as evidenced by the CheckView divestiture

Cisco (CSCO 0.37%) recently became a major rival to Checkpoint with the purchase of Sourcefire (FIRE.DL), which provides similar cyber-security solutions to those offered by Checkpoint. Cisco already has some reach in cyber-security, but adding a network-security specialist to its industry-leading connectivity hardware offerings could muscle smaller players like Checkpoint out of the market. The amalgamation of Sourcefire and Cisco might lead to Checkpoint right-sizing itself right out of the network-security arena, which would certainly constrain its avenues for future growth.

Putting the pieces together
Today, Checkpoint has few 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.