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 Altria's (NYS: MO) recent results tell us about its potential for future gains.

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

Growth is important on both the top and bottom lines, and an improving profit margin is a great sign that a company's becoming more efficient over time. Because profit may not always be reported at a steady rate, we'll also look at how much Altria'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 Altria's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

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

Healthy dividends are always welcome, so we'll also make sure Altria's dividend payouts are increasing -- but at a level that can be sustained by its free cash flow.

By the numbers
Let's take a look at Altria's key statistics:

MO Total Return Price Chart

MO Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

10.4%

Fail

Improving profit margin

(25.1%)

Fail

Free-cash-flow growth > net-income growth

13.5% vs. 16.8%

Fail

Improving EPS

19.1%

Pass

Stock growth +15% < EPS growth

109.9% vs. 19.1%

Fail

Source: YCharts. *Period begins at end of Q3 2009.

MO Return on Equity Chart

MO Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(1.3%)

Fail

Declining debt to equity

11.7%

Fail

Dividend growth > 25%

29.4%

Pass

Free-cash-flow payout ratio < 50%

109.4%

Fail

Source: YCharts. *Period begins at end of Q3 2009.

How we got here and where we're going
That's a really poor score for such a popular stock. Altria manages only two of a possible nine passing grades, as its stock price has far outpaced any improvement in its financial fundamentals. Does that mean this dividend dynamo's dramatic run is drawing to a close?

The market may be catching on to this possibility, as Altria's stock still hasn't recovered to the heights it reached early this summer. Neither have its peers; every major tobacco company's stock peaked in the summer and has been unable to recover. This includes international stalwarts Phillip Morris (NYS: PM) and British American Tobacco (ASE: BTI) , which ought to be insulated from the regulatory and demographic risks that imperil American tobacco. The culprit is likely to be a high-yielding stock stampede as investors worry that political inaction could raise taxes on their dividends.

Despite Altria's apparent strength, it doesn't fare too well against its domestic peers on a fundamental basis, either. Reynolds American (NYS: RAI) earned five out of nine passing grades on this same test a month ago. Lorillard (NYS: LO) handily trounced Altria in a head-to-head analysis in August. In spite of that, Altria's stock has kept pace with its competitors, which have risen without much genuine financial progress behind them. Foolish contributor Morgan Housel has called this phenomenon "dangerous" and a "dividend bubble," as investors seem to be blindly chasing yield without considering the fundamentals of the underlying stock.

Altria's efforts at financial improvement amount to cost-cutting and price increases, which have helped maintain its current position but hardly justify the intense interest its stock has generated over the past few years. Altria's a more one-dimensional company since cutting Phillip Morris loose. Its upside in the U.S. is limited at best and inversed -- i.e., there's only downside -- at worst. It's not likely to fall into ruin any time soon, but investors may want to consider the possibility that Altria's time as a "growth" stock is drawing to a close.

Putting the pieces together
Today, Altria has a few 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.

The Fool's analysts are here to help answer your questions, whether you're a potential investor seeking yield or a current investor looking for solid research on America's largest tobacco company. We've created a premium research service exclusively dedicated to Altria, with facts, figures, and projections to help make sense of this stock's future. We don't believe in spin, so you'll get an honest assessment of Altria over a full year of regular updates. Want to get started? Click here to subscribe today.

The article Is Altria Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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