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 Sherwin-Williams (NYSE:SHW) 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 Sherwin-Williams' 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 Sherwin-Williams' key statistics:

SHW Total Return Price Chart

SHW Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

33%

Pass

Improving profit margin

16.4%

Pass

Free cash flow growth > Net income growth

51.3% vs. 54.9%

Fail

Improving EPS

64%

Pass

Stock growth (+ 15%) < EPS growth

171.2% vs. 64%

Fail

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

SHW Return on Equity (TTM) Chart

SHW Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

20.7%

Pass

Declining debt to equity

59.1%

Fail

Dividend growth > 25%

38.9%

Pass

Free cash flow payout ratio < 50%

20.9%

Pass

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

How we got here and where we're going
Last year, Sherwin-Williams earned only four out of nine possible passing grades, but it has picked up two more in its second assessment for a new total of six passing grades thanks to its promising revenue growth and improved dividend payouts over the past few quarters. Sherwin-Williams' net income growth has barely outpaced free cash flow growth during our tracked period, which narrowly cost the company a failing grade. But the company's nominal trailing-12-month free cash flow is actually higher than its net income. On the other hand, Sherwin-Williams' stock growth continues to surge past its bottom line, which might be problematic for recent shareholders if the economy weakens. How might Sherwin-Williams perform over the coming year? Let's dig deeper to investigate some possibilities.

Sherwin-Williams has been delivering promising results through a combination of stronger pricing power and effective cost control measures. The company has been benefiting from the rebound in the housing market, but beyond this source of strength its prospects are less certain. Housing starts surged 5.3% to 891,000 in August, compared to 846,000 in June, and Fool contributor Matt DiLallo notes that annualized U.S. housing starts are expected to be in the range of 1.6-1.9 million units by 2015.

On the other hand, Sherwin-Williams and rival PPG Industries (NYSE:PPG) have both stated that the U.S. non-residential market, including marine and commercial construction, has remained weak this year, but both companies appear bullish on the near future. Fool contributor Dan Caplinger notes that paint makers have had to deal with fluctuating prices of titanium dioxide, a key pigment for paint production. Earlier this year, the specialty chemical maker Kronos (NYSE:KRO) raised its prices for titanium dioxide by $200 to $250 per metric ton, which indicates a revival of this chemical's flagging fortunes, but which also threatens to undermine Sherwin-Williams' solid margin growth of late.

Paint makers have also been trying to bolster their geographical presence through acquisitions. Sherwin-Williams recently finalized the acquisition of its Mexican peer Comex's U.S. and Canadian assets in a deal worth $90 million. But Mexico's Federal Competition Commission has again rejected Sherwin-Williams' proposed acquisition of the entire Comex enterprise for $2.4 billion, which would have created a North American paint powerhouse without peer. Rival PPG also bought AkzoNobel's North American architectural coatings business for $1.1 billion, which adds more than 600 stores in Canada, the Caribbean, and the U.S. to PPG's holdings The synergy of PPG and AkzoNobel's U.S. household paints division may wind up producing a price war against Sherwin-Williams' performance coating business.

Putting the pieces together
Today, Sherwin-Williams 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.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. 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.