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 Aqua America 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 Aqua America'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 Aqua America's key statistics:


WTR Total Return Price Chart

WTR Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

13.1%

Fail

Improving profit margin

72.4%

Pass

Free cash flow growth > Net income growth

218.8% vs. 95%

Pass

Improving EPS

87.1%

Pass

Stock growth (+ 15%) < EPS growth

94.6% vs. 87.1%

Pass

Source: YCharts.
*Period begins at end of Q2 2010.

WTR Return on Equity Chart

WTR Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

56.7%

Pass

Declining debt to equity

(15.8%)

Pass

Dividend growth > 25%

31%

Pass

Free cash flow payout ratio < 50%

140.4%

Fail

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
Last year, Aqua America earned five out of nine passing grades, but it's captured two more passes in its second assessment for a strong seven-of-nine showing. The company's free cash flow, while persistently below net income, has surged into positive territory to pick up a passing grade thanks to its stronger growth rate. Aqua America has also cut back its capital expenditures, allowing it to ease off the debt raises that are commonplace to most utilities. This is an impressive performance from a utility company, and Aqua America has a very legitimate chance to earn a perfect score next time around. How might Aqua America go from great to perfect? Let's dig a little deeper to find out.

Over the past five years, Aqua America has been able to grow its revenues by 8% per year, near the growth rate of sector leader American Water Works , thanks to a heightened focus on efficiency. Fool contributor Nathaniel Matherson notes that the company has made several acquisitions and shed under-performing assets to improve its operating efficiency and trim its long-run costs. In the first half of this year, Aqua America acquired water and wastewater assets in two transactions: British Woods Water Company in Virginia and Total Environmental Solutions in Pennsylvania. It is estimated that these acquisitions added about 6,150 new consumers to the company's portfolio, which is a small number but a foothold nonetheless.

Fool contributor Rich Smith notes that Aqua America has divested nearly two-thirds of its Florida assets for $53 million in cash. Aqua America will benefit from the movement of rural populations to urban coastal cities, heightened rates of drought, and industrial growth in the U.S., which will combine to increase water demand by 56% in 2025, according to the World Water Organization. Fool contributor Dan Caplinger notes that Aqua America also foresees enormous opportunities for growth in supplying water to fracking operations through its partnership with Penn Virginia Partners .

In other positive news, the Indiana Supreme Court ruled in favor of Aqua America , ending a 10-year-long dispute over its local water-utility assets, deciding that Aqua America's subsidiary was entitled to a higher value for some infrastructure seized in an eminent domain action. The company might also benefit from Lockheed Martin's innovation in desalinization filters, which require less energy to filter out salt and other unwanted substrates. However, water and waste-water infrastructure needs a massive $650 billion investment for repair and replacement over the next 20 years, according to the National Association of Water Companies and the U.S. Chamber of Commerce, which will curb the profitability of water-utility companies.

Putting the pieces together
Today, Aqua America 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.

More steady stocks for your portfolio
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notability of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

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

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Aqua America and owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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