Is United Parcel Service, 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 United Parcel Service (UPS 0.34%) 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 UPS' 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 UPS' key statistics:

UPS Total Return Price data by YCharts.

Source: YCharts. *Period begins at end of Q1 2011.

UPS Return on Equity (TTM) data by YCharts.

Source: YCharts. *Period begins at end of Q1 2011.

How we got here and where we're going
UPS has staged an impressive comeback since we first examined it last year, rising from its original two-of-nine score to rack up six out of nine possible passing grades for 2014. The company's net income, profit margins and free cash flow have normalized after a multibillion-dollar write-off for pension obligations dented its progress last year. UPS has also been able to maintain healthy dividend growth at a sustainable free cash flow payout ratio. Let's take a look at what UPS might do to make further improvements to its top and bottom lines to earn a rare perfect score next time around.

Despite its progress on our analysis, UPS delivered lackluster revenue and earnings per share in its first-quarter results. Unusually high overtime and transportation costs from a harsh winter combined with a major decline in business-to-business shipments to keep UPS down. Consequently, UPS now expects lower full-year earnings as a result of the tepid start to 2014.

Fellow shipper FedEx's (FDX 0.11%) fiscal third-quarter earnings results (ending in March) also showed a $125 million loss due to bad weather, prompting UPS' rival to unveil a $500 million investment plan that should boost capacity during peak times and thus avoid unnecessary delivery delays. UPS is taking a different tack toward stronger earnings, as it discontinued health care coverage for the working spouses of non-union workers, which is expected to result in more than $60 million in annual savings, but which is undoubtedly going to hurt the company's reputation in some circles. Fool energy specialist Jason Hall notes that UPS has been aggressively trying to cut operational expenses, as more than 1,000 LNG-powered trucks are scheduled for delivery over the next few years. UPS has also been implementing the ORION, or On Road Integrated Optimization and Navigation system platform, which is designed to help drivers find the best possible routes for timely deliveries.

UPS and FedEx also seem enthusiastic about the growth prospects in the long-moribund Eurozone. The European Central Bank recently implemented several major monetary-policy reforms, including slashing interest rates, levying negative interest on banks holding excess cash, and providing loans to banks at reduced interest rates to encourage fresh investments and trade, which should (in theory) produce the economic growth Europe has sought for the upcoming years. UPS generates more than half of its international revenue from European markets, and its market share on the Continent trails only German-based courier giant Deutsche Post.

According to Ecommerce Europe, shipping companies should be able to leverage the growing popularity of e-commerce -- only 25% of Europe's 820 million people now shop online at an estimated 550,000 Europe-based online businesses. UPS boasts ambitious plans to capitalize on this opportunity -- it will increase its access points to 3,000 each in the U.K. and Germany, and has also spent $200 million to increase its capacity to 190,000 packages per hour at its hub facility in Cologne, which is a larger volume than Deutsche Post's expansion plan that will enable its Leipzig facility to sort 150,000 packages per hour. But let's not forget that e-commerce is a global phenomenon -- Forrester Research projects that global e-commerce sales will reach $1 trillion by 2016, with the U.S. alone accounting for more than $371 billion of that online spending. Meanwhile, cross-border shoppers number 130 million, and will spend roughly $307 billion by 2018, up from 94 million cross-border shoppers in 2013, according to a Nielsen survey. This surge of online consumers will undoubtedly keep the winds at UPS' back as it seeks to bring more stuff to more people, year after year.

Putting the pieces together
Today, United Parcel Service 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.