Is Stamps.com Destined for Greatness?

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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 Stamps.com 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 Stamps.com'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 take a look at Stamps.com's key statistics:


STMP Total Return Price Chart

STMP Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

43.8%

Pass

Improving profit margin

194.8%

Pass

Free cash flow growth > Net income growth

54.6% vs. 324%

Fail

Improving EPS

305.9%

Pass

Stock growth (+ 15%) < EPS growth

337.3% vs. 305.9%

Fail

Source: YCharts. * Period begins at end of Q1 2010.

STMP Return on Equity Chart

STMP Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

163.5%

Pass

Declining debt to equity

No debt

Pass

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we're going
Stamps.com puts together a solid performance, missing out on a perfect score primarily because net income has surged past free cash flow. Despite this issue, Stamps.com shares have hit new peaks since emerging from the crash of 2008, and if EPS nudges higher over the next few quarters, the company could easily pick up another passing grade. But does that mean Stamps.com will keep outperforming in the future? Let's dig a little deeper.

The United States Postal Service may be limping toward extinction, but postage itself is hardly a dying business. Investors might have worried that demand would soften along with the USPS decline, but the results above show anything but. Stamps.com's PC postage business earned a record $30.3 million in its latest quarter -- a 16% gain over the prior year. Stamps.com also hit its highest-ever level of paid customers and added 92,000 small businesses to its roster this quarter, giving investors plenty of good vibes about the company's prospects going forward. High-volume shipping orders also rose by 74% from last year. However, volume through Amazon.com was down again, and this continues to be a drag on growth.

Enterprise-level growth grew 53% year over year and shows no signs of slowing. Stamps.com particularly wanted to attract small to medium-size business customers and boosted marketing spend by double digits to appeal to such customers in 2012. That effort seems to have paid off. Stamps.com seems to be effectively scaling its marketing expenses, which is important given the relatively tight nature of this business. Though it increased its acquisition spend, the number dropped on a per-acquisition basis, which has led to a record quarterly small business addition total. According to the National Federation of Independent Business, small businesses still feel less confident about the economy than they used to. If confidence picks up, investors might expect even better growth from Stamps.com's small business segment.

Putting the pieces together
Today, Stamps.com 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.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

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

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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