Is Veeco Instruments Inc. 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 Veeco Instruments (VECO -2.35%) 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 charts you're about to see tell Veeco'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 ratio declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Let's take a look at Veeco's key statistics:

VECO Total Return Price data by YCharts.

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

VECO 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 at all for Veeco. The LED equipment maker picked up only two out of seven possible passing grades today, and one of those was only awarded because of a technicality -- Veeco's trailing 12-month free cash flow is barely in positive territory, but the bottom line has fallen into the red. Veeco's revenue growth has collapsed due to persistent overcapacity and pitiful business conditions in its primary markets. Will Veeco be able to rebound, or is the company bound to fall apart in the long run? Let's dig deeper to see what the future might hold.

Veeco has delivered lackluster results for three straight quarters in 2013. Fool contributor Rich Duprey notes that the company's aforementioned combination of excessive supply and poor business conditions has taken the form of subdued booking volumes in its metal organic chemical vapor deposition, MOCVD, and data-storage segments. Canaccord recently downgraded Veeco to sell status, as price competition could prevent MOCVD manufacturing device makers from gaining further traction in the near future.

On the other hand, the company has finally filed its three delayed quarterly reports with the SEC, ameliorating some investor concerns related to an accounting review over potential revenue-recognition issues. Fool contributor Rich Smith points out that Veeco still has plenty to offer to its loyal shareholders -- the company has generated over $51 million in free cash flow over the past four quarters. Quite recently, hedge fund D. E. Shaw took an undisclosed position in Veeco, so Wall Street hasn't quite abandoned company.

Residential lighting products have also enjoyed robust demand on the heels of new housing development and renovation across the U.S., which should in time increase demand for Veeco's LED-manufacturing equipment. Fool contributor Harsh Chauhan notes that the worldwide LED market is poised to grow at an annualized rate of 34% to reach nearly $100 billion in the next few years. An anticipated ban on a number of traditional incandescent light bulbs will also push LED manufacturing as consumers are forced to upgrade to high-tech bulbs. Rising demand for organic LED technology could undermine Veeco's growth prospects, however, as OLEDs can deliver more energy savings and flexibility than the traditional LEDs made by Veeco's instruments.

Putting the pieces together
Today, Veeco Instruments 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.