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 Western Union (NYSE:WU) fit the bill? Let's look at what its recent results tell us about the company's potential for future gains.

What we're looking for
The charts below tell Western Union's story, and we'll grade 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
Here are Western Union's key statistics:

WU Total Return Price Chart

WU Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

6.7%

Fail

Improving profit margin

(17.8%)

Fail

Free cash flow growth > Net income growth

(3.8%) vs. (12.3%)

Pass

Improving EPS

5.5%

Pass

Stock growth (+ 15%) < EPS growth

(8.6%) vs. 5.5%

Pass

Source: YCharts. * Period begins at end of Q4 2010.

WU Return on Equity (TTM) Chart

WU Return on Equity (TTM) data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(61.7%)

Fail

Declining debt to equity

(32.5%)

Pass

Dividend growth > 25%

78.6%

Pass

Free cash flow payout ratio < 50%

32.7%

Pass

Source: YCharts. * Period begins at end of Q4 2010.

How we got here and where we're going
Western Union's score hasn't changed since our last assessment, as the money-transfer leader earned the same six out of nine possible passing grades this year as it did at the end of 2012. However, the company's profit margins have plummeted due to fierce competition from technologically adept money-transfer services that are now available at lower cost in many parts of the world where Western Union once dominated. One of Western Union's passing grades was only awarded on a technicality -- the decline in its free cash flow is less severe than the drop in its net income over the course of our three-year tracking period. Will Western Union's patient shareholders be rewarded with a rebound in 2014 and beyond, or will the company finally discover that its services just can't compete in a mobile world anymore? Let's dig a little deeper to find out.

Western Union recently reported lackluster fourth-quarter earnings, largely due to cutthroat price competition from low-cost (or no-cost) mobile payment systems offered by leading telecom operators such as Vodafone (NASDAQ:VOD). My fellow writer Reuben Brewer notes that Vodafone's M-PESA money transfer service has picked up massive market share in emerging-market nations including India, Kenya (where it owns 75% of the market!), South Africa, and Egypt. Vodafone also has its eye on European markets, as it rolled out M-PESA services in Romania last month. While Western Union has been gearing up to target underbanked consumers in emerging markets, it faces an uphill battle against Vodafone and other money-transfer companies such as MoneyGram (NASDAQ:MGI) and Xoom (NASDAQ:XOOM).

According to the Federal Deposit Insurance Corporation, 28% of the U.S. population is "under-banked," which means they have limited or no access to banking services. Fellow Fool Reuben Brewer notes that Western Union, Xoom, and Green Dot all plan to drive domestic growth by rendering bank-like services to this largely abandoned consumer segment. Western Union's efforts on this front include prepaid cards, which it's also pushing hard in international markets. However, Xoom's recent acquisition of online bill-payment service provider BlueKite could undermine Western Union here as well -- Xoom's customer count grew 36% year over year in its fourth quarter even before it added this increased level of convenience.

Retail giant Wal-Mart (NYSE:WMT) is also undercutting Western Union and its peers through a new partnership with Euronet Worldwide subsidiary Ria. This team will launch a branded money-transfer service called Walmart-2-Walmart, which poses a major danger to MoneyGram (Wal-Mart's current money-transfer partner), but could also threaten Western Union simply due to its humongous size and its preference for setting up shop in areas high in underbanked populations.

Foolish writer John Divine points out that Wal-Mart has already launched its own money-transfer services at more than 4,000 domestic locations, and it seems determined to undercut current industry rates by as much as 50%. Consequently, Western Union might be forced to lower its prices to remain competitive domestically. However, management plans to produce $1 billion in operating cash flow next year, which is consistent with its results from the past five years. The company has also authorized a $500 million share repurchase program to bring back investors' confidence.

Putting the pieces together
Western Union 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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Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Vodafone and Western Union. 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.