Is Nordic American Tankers 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 Nordic American Tankers (NAT 1.85%) 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 Nordic'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 declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Nordic's key statistics:

NAT Total Return Price data by YCharts.

Source: YCharts. * Period begins at end of Q2 2010.

NAT Return on Equity data by YCharts.

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
This looks very ugly for Nordic, as the shipping company mustered only one out of nine passing grades. However, one should keep in mind that its net income was essentially zero at the start of our tracking period, which makes its decline look apocalyptic when it's merely abysmal. Over the past three years, its profit margins have collapsed due to a decline in U.S. imports. However, the company recently saw an uptick in revenue, as global shipping rates have started to rebound over the past couple of quarters. Can Nordic push its revenue growth further forward? Let's dig a little deeper to find out.

The shipping industry has been struggling since the financial crisis due to a combination of sluggish economic growth and oversupply problems. Fool contributor Dan Newman notes that the Baltic Dry Index has tumbled drastically from a level of 11,000 in 2008 to barely a tenth that level, but in recent months it has begun to reverse course and has surged to almost 2,000 points.

Dry bulk shipping isn't Nordic's focus, but its focus on oil shipments has also caused more than a fair deal of financial pain. The U.S. is importing about 28% less oil from the Persian Gulf than its peak in 2005. Oil consumption is declining in other developed countries as well due to the combination of rising costs and the increasing availability of alternative fuel sources. Global oil production costs are expected to increase 9% annually, which could further reduce U.S. oil imports if prices also increase, making tougher oil in American shale deposits more attractive. As a result of these problems, the day rates for crude oil tankers has collapsed by nearly 70% per day, which has severely wrecked the profitability of large Suezmax ships operators like Nordic and Frontline (FRO 3.17%).

Despite the glut of ships throughout the tanker industry, Nordic added a new vessel for $55 million -- pushing its fleet up to 21 tankers. This expansion might have prompted Nordic to issue $87 million of new stock, as it also plans to make some strategic asset acquisitions. Rival Frontline is looking to scrap older tankers to cut capacity, which would be a positive for the more aggressive Nordic should day rates improve as a result. After shipping prices collapsed, Frontline ended an arrangement with Nordic under which they pooled around 30 of their vessels into a single entity. Industrywide weakness could push the two operators closer together again, as there's something to be said for strength in numbers.

Putting the pieces together
Today, Nordic American Tankers 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.