Is Pitney Bowes 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 Pitney Bowes (PBI -0.47%) 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 Pitney Bowes' 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 Pitney Bowes' key statistics:

PBI Total Return Price data by YCharts.

Source: YCharts. *Period begins at end of Q3 2010.

PBI Return on Equity (TTM) data by YCharts.

Source: YCharts. *Period begins at end of Q3 2010.

How we got here and where we're going
Things don't look good for Pitney Bowes in its second assessment, as the mail solutions provider has lost two of the four passing grades it earned last year, and the remaining two (out of nine) passing grades are more technicalities than marks of genuine improvement, as the company began its tracking period with negative equity. Pitney Bowes' profit margins have collapsed in recent quarters as competition from established technology-focused companies has prevented more effective diversification efforts. The company has spent a lot of cash to pay off its maturing debts earlier this year, but its debt-to-equity level continues to rise nonetheless. What steps is Pitney Bowes currently taking to overcome these weaknesses? Let's look closer to find out.

Over the past few years, Pitney Bowes' postage-meter business has faced severe headwinds from a wholesale shift toward digital communications systems, which has had the secondary effect of sparking a digital takeover of the old-fashioned postage business as well. Fool contributor Timothy Green notes that first-class mail volumes processed by the U.S. Postal Service have declined by nearly a third in just one year. However, adjusted net income is up year over year in the company's latest quarter -- but this is hardly reflected in the GAAP numbers shown on our charts. The company has also paid nearly $200 million in interest on a $3.6 billion debt on the books, and these high levels of debt are likely to cause major problems as demand for physical mails -- long the company's bread and butter -- continues to decline.

In an effort to streamline operations and raise funds, Pitney Bowes sold its North American management services business, which represented 19% of its revenue, to Apollo Global Management for $400 million in cash. Pitney Bowes has also entered into an agreement with Swiss Post Solutions to divest its U.K.-based management services business. My fellow Fool Sean Williams notes that the company also plans to use the proceeds from these transactions to maintain its still-high dividend yield without cutting research funding for its cloud-based logistics software efforts.

Pitney Bowes hopes to generate strong growth from its enterprise business solutions segment as a result of the continued expansion in mail services and pre-sort operations for various e-commerce initiatives, but this segment has lower profit margins. Pitney Bowes' future growth prospects are uncertain at best in an increasingly digital environment. Many businesses and individuals are moving away from traditional physical mail to paperless solutions, and despite efforts to move with the market, Pitney Bowes has a major disadvantage in its efforts to go high-tech; the competition in this arena is fiercer than the competition in postage services ever was.

Putting the pieces together
Today, Pitney Bowes 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.