Is Nutrisystem 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 Nutrisystem (NTRI +0.00%) fit the bill? Let's 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 Nutrisystem'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 look at Nutrisystem's key statistics:

NTRI Total Return Price data by YCharts

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

NTRI 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
We looked at Nutrisystem last year, and it has earned one more passing grade in its second assessment, but that only brings it up to a score of two out of nine possible passing grades. The company has continued to fall short on almost every metric -- revenue, margins, and free cash flow have all continued to weaken, and dividend payouts eat up most of the company's free cash flow, which is a dangerous sign. However, Nutrisystem's stock has gained more than 24% since we last examined it. Is this rebound sustainable, or will the weight-management specialist lose more financial ground, rather than help more people lose more pounds? Let's dig deeper to find out.

Nutrisystem may have reversed its slide in the near term, as it enjoyed 5% year-over-year sales growth in its latest quarter. CEO Dawn Zier's four-point turnaround plan, which focuses on product innovation, customized meal plans, home-delivered meal packages, and bricks-and-mortar operations, seems to be working. Fool contributor Brandy Betz notes that the company's Jumpstart Weight Loss kits could be a boon to Nutrisystem's fortunes for the 2014 diet season, as it could gain significant attention from frustrated dieters attempting another New Year's weight-loss resolution. The American Diabetes Association recently approved the diabetic-tailored version of Jumpstart, which is also a solid advantage in the highly competitive weight-loss field. Nutrisystem also entered into partnerships with retailers Target and Wal-Mart, which adds greater visibility and thus offers the promise of future gains in retail sales.

With obesity rates on the rise, lawmakers have become more serious about prompting Americans to change their dietary habits, which may benefit weight-loss operators such as Nutrisystem, Weight Watchers (WTW +0.00%) and Medifast (MED +0.64%). However, Nestle's decision to exit the weight-management business suggests that there's little hope for fat profits, despite the fact that the total U.S. weight-loss market is expected to grow by 2.6% to $62.8 billion this year.

Fool contributor Leo Sun notes that Nutrisystem and its peers have been facing fierce competition from fitness and calorie-tracking gadgets like Nike's Fuelband, which offers a more active alternative to food-based programs. The weight-management companies have also been struggling with a proliferation of free applications on mobile app stores. According to Marketdata analysts, 82% of people picked self- directed programs like websites, apps, and diet books in 2012. However, Nutrisystem ought to be less vulnerable to threats from the persistent mobile revolution than Weight Watchers, which has a rigid paid membership structure. On the other hand, Nutrisystem lacks customer loyalty, as most people subscribe Nutrisystem's weight-loss plan for three months or less, which can lead to mercurial cash flow and profits surrounding the peak dieting season.

Putting the pieces together
Today, Nutrisystem 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.