Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Tempur-Pedic's (NYSE: TPX ) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Tempur-Pedic's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always be reported at a steady rate, we'll also look at how much Tempur-Pedic's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Tempur-Pedic's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Tempur-Pedic managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

By the numbers
Now, let's take a look at Tempur-Pedic's key statistics:

TPX Total Return Price Chart

TPX Total Return Price data by YCharts

Passing Criteria

2.5-Year Change*

Grade

Revenue Growth > 30% 76.1% Pass
Improving Profit Margin (25.7%) Fail
Free Cash Flow Growth > Net Income Growth 60.1% vs. 139.6% Fail
Improving Earnings per Share 172.3% Pass
Stock Growth (+ 15%) < EPS Growth 29.2% vs. 172.3% Pass

Source: YCharts. *Period begins at end of Q4 2009.


TPX Return on Equity Chart

TPX Return on Equity data by YCharts

Passing Criteria

2.5-Year Change*

Grade

Improving Return on Equity 304.9% Pass
Declining Debt to Equity 225.9% Fail

Source: YCharts. *Period begins at end of Q4 2009.

How we got here and where we're going
With four of seven possible passing grades, Tempur-Pedic offers a reasonable, but not strong, case for its value. However, the company's certainly found itself with a more attractive valuation now that its stock's growth has fallen far below that of its bottom line. At the beginning of our tracking period, Tempur-Pedic's P/E was 31. It's since shrunk to less than a third of that earlier level, with a P/E just under double digits today.

Tempur-Pedic made waves earlier this month by announcing the acquisition of smaller rival  Sealy (NYSE: ZZ ) , a deal that includes assuming the $760 million in debt presently on Sealy's balance sheet. Doing so will more than double Tempur-Pedic's present debt load, which is already five times as large as its available cash. It remains to be seen if Tempur-Pedic can bring Sealy's anemic (and often negative) profit margin more in line with its own.

Tempur-Pedic's already the best value in the mattress sector right now. Mattress Firm's (Nasdaq: MFRM ) P/E is roughly double Tempur-Pedic's, and Select Comfort's (Nasdaq: SCSS ) is even higher. That discrepancy reflects the difference of analyst opinions on the three companies. Tempur-Pedic's anticipated growth rate next year is 12%, which is half Select Comfort's and even lower than Mattress Firm's. Now that Tempur-Pedic's roughly doubled its expected revenues (Sealy made only $150 million less than its new parent last year), it may be able to draw closer to those high growth rates.

Putting the pieces together
Tempur-Pedic 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.

You shouldn't sleep on the opportunity to buy a good stock at a great price. Some of the best opportunities are the hidden gems right under your nose, small but important links in the economic chain that Wall Street's often too rich notice. The Fool loves to find stocks like this, and we've come across three that have the potential to be "Middle Class Millionaire-Makers." All the information you need is in our latest free report, so click here to find your next winner now.

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