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 National Presto (NYSE:NPK) 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 Presto'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 Presto's key statistics:

NPK Total Return Price Chart

NPK Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

(9.7%)

Fail

Improving profit margin

(40.1%)

Fail

Free cash flow growth > Net income growth

(89.6%) vs. (45.9%)

Fail

Improving EPS

(46.3%)

Fail

Stock growth (+ 15%) < EPS growth

(3.5%) vs. (46.3%)

Fail

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

NPK Return on Equity Chart

NPK Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(45.3%)

Fail

Declining debt to equity

No debt

Pass

Dividend growth > 25%

(21.2%)

Fail

Free cash flow payout ratio < 50%

708.6%

Fail

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

How we got here and where we're going
Presto could use a lifeline today -- it's earned only one passing grade thanks to its long tradition of debt-free operation. One major source of its weakness is crashing free cash flow, which is responsible for two failing grades, and which could result in further dividend cutbacks should a recovery not materialize. (This company relies on annual special dividends rather than a modest regular distribution.) The company's declining revenue and profit margins have also contributed to a long period of weakness in Presto's shares. How might National Presto recover from this disappointing performance? Let's dig a little deeper to find out.

Presto's latest quarterly report showed weak sales in both defense and absorbent products segment, while housewares and small appliance sales rose modestly by 4.8%. Due to its smaller size, Presto doesn't possess the competitive advantage of scale that might allow it to outperform as a diversified products manufacturer. The company faces strong competition from Procter & Gamble (NYSE:PG) and Stanley Black & Decker (NYSE:SWK) in the absorbent and small appliances segment, respectively -- the former has a major line of disposable diapers in Pampers, and the latter is a household name when it comes to electric tools. These two companies present a more stable investment opportunity due to their larger sizes and stronger branding. But Presto could provide a lucrative buyout opportunity, since it has about $100 million in cash and no debts on the books. But since this opportunity has been known for years, it seems unlikely that we'll see a bigger fish come swimming up anytime soon.

Still, Presto remains poised to benefit from its ammunition business, as it has been diversifying its operations through acquisitions. Most recently, Presto's AMTEC subsidiary announced the acquisition of Florida-based ammunition manufacturer DSE, which sells 40mm ammunition to the U.S. government. The transaction will be closed only when DSE and AMTEC agree to move DSE's government contract to AMTEC, which also bagged a $64.5 million option contract from the Department of Defense to supply 40mm ammunition to the U.S. Army. It's expected to run through 2015.

Putting the pieces together
Today, National Presto 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.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. The Motley Fool owns shares of National Presto Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.