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 Intrepid Potash (NYSE: IPI) fit the bill? Let's 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 Intrepid'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 look at Intrepid's key statistics:

IPI Total Return Price Chart

IPI Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

38.9%

Pass

Improving profit margin

68.3%

Pass

Free cash flow growth > Net income growth

(2,100%) vs. 133.8%

Fail

Improving EPS

128.6%

Pass

Stock growth (+ 15%) < EPS growth

(15.4%) vs. 128.6%

Pass

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

IPI Return on Equity Chart

IPI Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

80%

Pass

Declining debt to equity

Raised from zero

Fail

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

How we got here and where we're going
Intrepid comes through with a solid performance, earning five out of seven passing grades. One major source of weakness is the company's falling free cash flow, which has fallen far into negative territory lately, and which may be the proximate cause of a recent debt raise that cost it its second failing grade. Let's dig a little deeper to find out what Intrepid Potash is currently doing to reverse this cash flow decline and earn itself a rare perfect score next year.

In recent months, Intrepid has struggled to prop up its share prices due to a combination of excessive supply in the fertilizer market and a drought in the U.S. Uralkali, the world's largest producer of potash, decided to sell its potash at spot prices in the open market this summer, which had an immediate effect on potash prices, which are expected to plunge by 25%, to about $300 per ton, by the end of this year. Intrepid could to see its profit margins crippled, as it generates more than 80% of its revenue from potash. Fool contributor Sean Williams points out that the company doesn't have enough capital to diversify into other product lines or make acquisitions to mitigate the underlying risk, which poses major problems going forward.

The only bright spot on the potash horizon, according to the International Fertilizer Industry Association, are significant delays and setbacks at PotashCorp's (NYSE: POT) production units. This will result in a huge reduction of global potash capacity, which, if not enough to offset the Uralkali move, might be at least enough to keep prices from collapsing entirely. Fool contributor Maxx Chatsko notes that Potash Corp has also decided to cut production levels at its Lanigan and Rocanville mines in order to respond to a persistent oversupply problem. These moves will give potash producers some breathing room, as it will boost demand and prices of potash in international markets. Over the long run, this isn't likely to fix industry issues, as Uralkali shows no signs of trimming its production levels to keep potash prices stable.

Intrepid does anticipate strong demand in the upcoming fall season as farmers shift toward low-cost fertilizers. The company's long-awaited HB Solar Solution mine, one of the lower-cost potash mines in North America, is expected to be ready for commercial operations before the end of this year. Intrepid has also invested approximately $100 million to construct a new compaction plant that will handle the complete production from HB Solar Solution mine as well as the company's existing West mine.

Putting the pieces together
Today, Intrepid Potash 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.

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Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.