The last time The Motley Fool reported on American Locker (NASDAQ:ALGI) was on June 30, 1998 -- after the stock had soared 380% in six months. The question then was how to spot such a big gain before it happened.

Fast-forward six years, and the stock that sold for $30.00 then is changing hands today for $14.40 a share (a 52% drop). Yikes -- talk about long-term dead money! Did the company bite the proverbial dust? No; in fact, it is operating profitably and generating free cash flow.

You may not know the company name, but you have seen its locker products at the local gym, school, or airport. Back in 1997, the hot news was a U.S. Postal Service contract. Keyed storage boxes for mail and packages inside post offices or at central locations in residential and commercial locations were growing strongly.

The latest earnings report is a mixed bag. It is great news that third-quarter revenue is up 34% and that net income increased 267% to $1.10 a share. That's a lot of income, after tax, for one quarter! But plastic storage boxes for mail delivery (58% of sales) were inflated by a one-time "bulk order" from the USPS of $7 million. Take that sale out of nine-month 2004 total revenue, and sales would have been up only 9%.

Even worse, the company's contract with the USPS for "cluster block units" expires Feb. 28. When bidding starts, the company's principal competitor and three new qualified bidders will be lusting over a new "upgraded specification." Translation: Competition will probably decrease profit margins -- already low at 7% -- and the new design may require retooling that will also drive down short-term profitability.

With 1.5 million shares outstanding, American Locker is extremely small. No brokerage firms cover the stock, and 22% is held by insiders. The company carries a net debt of $4.3 million -- a reasonable level if the company maintains all of its USPS-related business at current profit margins.

The company is trading at seven times trailing earnings -- an extremely low level. The stock, which hit a 52-week high on Friday, was buoyed by the outstanding earnings news. American Locker is the big fish in the secure storage locker marketplace. Unfortunately, the pond is small. Investors would be wise to note the upcoming USPS bidding risk and stand aside until it is clear the company will not lose that contract.

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Fool contributor W.D. Crotty does not own stock in American Locker.