Is K12 Inc. 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 K12 (LRN -0.74%) 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 K12'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 K12's key statistics:

LRN Total Return Price data by YCharts.

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

LRN 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
K12 puts together a respectable performance today -- the for-profit education company earns 4 out of 7 possible passing grades. K12's revenue has risen rapidly over the past three years as it's moved into more school districts around the country, but profit margins have contracted thanks to higher operational expenses. K12's shares have also been battered by both a major short-selling campaign and sluggish enrollments over the past few quarters. Will K12 be able to rebound, or will the online educator flunk out of investor portfolios? Let's dig a little deeper to find out.

K12 reported lackluster results in its latest quarterly earnings report, which was a main cause of the big drop in share price this fall. Although K12's revenue rose 3.3% year over year to $228.4 million, losses grew to $5 million, 12% worse than the year-ago quarter. K12's management blamed market pressure on some of its product lines, which has weakened growth in institutional sales. Additionally, the company has suffered from recent changes to its contract agreements, and from higher operational expenses accumulated in anticipation of stronger student enrollment that no longer appears in the cards.

K12's average student enrollments grew by a rather weak 5.7% year over year during that quarter, which led to a major disappointment among shareholders. BMO Capital downgraded the stock to neutral and slashed its price target nearly in half after the report. More than two-and-a-half years ago, Fool contributor Brian Stoffel warned investors not to bet on for-profit education companies, particularly for-profit colleges and universities. So far, the prediction has proven true to a fair extent, as for-profit colleges such as Apollo Group, Corinthian Colleges, and Education Management have underperformed on the indexes during our three-year tracking period. It took K12 some time to catch up to that bloodbath, but the indicators are now there that primary- and secondary-age for-profit schools (of which K12 is the largest example) are also losing favor with the public:

LRN Total Return Price data by YCharts.

However, investors seem to be warming up to K12's new growth plans, which will result in the creation of a new independent company that will push technology-based learning programs at all education levels around the world. This company will be built with the support of an investor group led by Dubai-based Safanad. K12 also partnered with the Board of Directors for the Idaho College and Career Readiness Academy, or IDCCRA, to create a new online technical high school for students in Idaho, which shows that its traditional offerings still remain in demand. K12 also launched two new mobile apps, Choc-It-Up and Timed Reading & Comprehension Practice, which will be available on Android and iOS platforms. These offerings help extend the company's brand into the booming field of mobile-based education, and they could enhance student engagement with its existing programs.

Putting the pieces together
Today, K12 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.