Is Nike 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 Nike Inc. (NKE 0.95%) 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 Nike'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 Nike's key statistics:

NKE Total Return Price data by YCharts

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

NKE 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
Nike puts together a solid performance by earning six out of nine possible passing grades. While Nike's free cash flow growth has diverged from its net income growth, the company maintained sustainable dividend payouts at current cash flow levels, and a rebound could be in store next year. However, Nike's stock growth has outpaced the gains in its net income, which is a worrisome sign for investors in search of sustainable growth. Does that mean Nike won't be able to maintain its progress in the future, or will the athletic-wear market leader overcome its few fundamental weaknesses to become that rare perfect stock? Let's dig a little deeper to find out.

Nike delivered better-than-expected revenue and earnings for its fiscal second quarter -- these metrics were up 8% and 4% year over year, respectively -- thanks to continued strength in its direct retail channel and consumers' shift toward high-end products. Fool contributor Jason Hall notes that the company boasts a strong order backlog for its athletic footwear and apparel (worth more than $10.4 billion), which are expected to be delivered by April 2014. Nike has also ramped up its international marketing efforts, particularly in India and China, as it expects the world's middle-class population to increase by 1 billion consumers over the next decade. Nike should also benefit from a five-year, $1.1 billion deal with the NFL to supply gear.

Fool contributor Marshall Hargrave notes that Nike is also poised to capitalize on the growing women's yoga apparel market, and it expects to grow its global market share in all athletic apparel to 6.5% by the end of 2019. It's not alone in this quest, as Under Armour (UAA 0.92%) has recently made various big moves by signing deals with ballet dancer Misty Copeland, tennis star Sloane Stephens, and skier Lindsey Vonn to market its own line of yoga wear. Nike's Free Flyknit running shoes also continue to be popular with a wide range of consumers.

Nike's Fuelband line should also give it a foothold in the global "wearables" market for consumer electronics, which is expected to grow to $20 billion in global sales by 2017. However, Sony's (SONY 0.37%) SmartWatch and Samsung's voice-activated Galaxy Gear could threaten Nike's Fuelband should adequate fitness apps emerge for these devices. Nike does retain a pricing advantage over Under Armour's Armour39 chest strap and watch, which are being sold at higher prices. Fool contributor Andres Cardenal notes that Under Armour's recent acquisition of MapMyFitness might help it better compete head-to-head with Nike in social-fitness gadgets.

Putting the pieces together
Today, Nike has many 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.