Is Nutrisystem Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Nutrisystem's (NTRI +0.00%) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Nutrisystem's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always be reported at a steady rate, we'll also look at how much Nutrisystem's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Nutrisystem's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Nutrisystem managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Nutrisystem's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Nutrisystem's key statistics:

NTRI Total Return Price data by YCharts.

Source: YCharts. * Period begins at end of Q2 2009.

NTRI Return on Equity data by YCharts.

Source: YCharts. * Period begins at end of Q2 2009.

How we got here and where we're going
Nutrisystem has helped plenty of people lose weight, but it seems to take the whole "losing" thing a bit too seriously. It scores only one of nine possible passing grades, having lost revenue, lost its margins, lost its stock gains, and pretty much every other number that still marks it as a successful company. It's avoided becoming unprofitable by the slimmest of margins but, if this trend continues, it won't be able to stay profitable much longer.

Nutrisystem actually appears to be the weakest major competitor of all the viable alternatives I could find. Medifast (MED +0.73%) and Weight Watchers (WTW +0.00%) have both been struggling with declining earnings of their own lately, but they've both maintained (so far) an improvement over their starting positions three years ago:

HLF Net Income TTM data by YCharts.

Nutritional-supplement distributor Herbalife (HLF 2.37%) has done a much better job at that whole growth thing, to put it mildly. Healthy-lifestyle supercenter Life Time Fitness (NYSE: LTM) has a proven ability to grow with a premium-price strategy (well beyond premium if you pay for personal training), even though its stock price may have gotten ahead of its fundamentals earlier this year. Nutrisystem, on the other hand, had a big marketing campaign ready for 2012, which has thus far done absolutely nothing to turn the company's fortunes around.

Making matters worse, Nutrisystem's still in the middle of a CEO search. Will the company be able to find an executive brilliant enough to reverse what now appears to be an industrywide trend away from nutrition-centric weight loss solutions? The holiday season is never a popular time to start (or continue) a weight-loss program, so there's little reason to expect the company to see any real surge until next year. Even then, it will take some impressive execution to right this ship.

You might like its dividend, but a high yield only matters when the underlying business can support it while continuing to grow. That doesn't look to be the case with Nutrisystem.

Putting the pieces together
Nutrisystem has very 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.