Is Autodesk 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 Autodesk's (ADSK -1.06%) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Autodesk'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 reported at a steady rate, we'll also look at how much Autodesk'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 Autodesk's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Autodesk 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.

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

ADSK Total Return Price data by YCharts.

Source: YCharts. *Period begins at end of Q3 2009 (Oct. 31).

ADSK Return on Equity data by YCharts.

Source: YCharts. *Period begins at end of Q3 2009 (Oct. 31).

How we got here and where we're going
Autodesk earns four out of seven possible passing grades. Recent margin weakness, on a bottom line that's otherwise galloped ahead of the impressive three-year growth in its free cash flow, has hurt its total score. What will it take to get Autodesk aligned for greater success next year?

Although Autodesk's stock is positive for the past year, it's been stuck in a rut all summer, particularly after a brutal quarterly earnings report at the end of August. The company's slashed guidance wasn't mended in its next report, which also guided below analyst expectations.

This is a bit puzzling in light of renewed strength across the construction sector. As the creator of AutoCAD, Autodesk's fortunes are typically tied to the demand for new construction -- and homebuilders across the board are back on the lot once again.

Bellwether home-improvement warehouse Home Depot (HD -1.62%) has been one of 2012's best stocks, and homebuilders PulteGroup (PHM -0.14%), D.R. Horton (DHI -1.24%), and Hovanian (HOV -0.53%) are all trouncing Home Depot. Those three companies should require more design resources as their workload increases, but Autodesk hasn't gotten that benefit yet -- both net income and free cash flow remain below 2008's levels, despite a late-2009 rebound captured in the graphs above.

Autodesk's deep expertise with 3-D design has been repeatedly singled out as a great asset in a manufacturing future that may one day be dominated by 3-D printing. Former Wired editor in chief and current robotics start-up CEO Chris Anderson singled out Autodesk and 3D Systems (DDD -1.43%) as two big winners from this trend, noting that Autodesk has several accessible programs for easily converting real-world objects into 3-D designs, and vice versa. My fellow Fool Travis Hoium brought up the same point months earlier, so there does seem to be a growing consensus among in-the-know tech thinkers that Autodesk's future could be in this "maker" movement.

This suite of easy-to-use software may even undermine 3D Systems' leadership role in the space over time, just as Microsoft (MSFT 0.31%) helped undermine IBM's (IBM 0.47%) leadership in the early PC era by making its operating systems usable on any of the IBM clones that quickly flooded the market.

Autodesk's reliance on the construction industry may eventually become a thing of the past, but right now, this company is stuck between two trends and unable to fully capitalize on either. Perhaps by the next time we examine Autodesk, it will have finally gotten the benefit of a homebuilding rebound, and the "maker" movement will put extra wind in its sails to get those three extra passing grades it needs for a perfect score.

Putting the pieces together
Today, Autodesk 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.