Select Comfort Corp. (SCSS): Is This Stock Destined for Greatness?

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 Select Comfort Corp. (NASDAQ:SCSS) 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 Select Comfort Corp. (NASDAQ:SCSS)’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 Select Comfort Corp. (NASDAQ:SCSS)’s key statistics:

Source: SCSS Total Return Price data by YCharts.

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	71.8%	Pass
Improving profit margin	(78.1%)	Fail
Free cash flow growth > Net income growth	(19.2%) vs. 119.7%	Fail
Improving EPS	77.9%	Pass
Stock growth (+ 15%) < EPS growth	183.7% vs. 77.9%	Fail

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

Source: SCSS Return on Equity data by YCharts.

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(41.8%) **	Fail
Declining debt to equity	(100%)	Pass

Source: YCharts. * Period begins at end of Q4 2009.
** Begins at Q4 2010 due to abnormally high starting value in 2009.

How we got here and where we’re going
Despite significant growth on some metrics, Select Comfort Corp. (NASDAQ:SCSS)’s had a hard time justifying its share price of late — which may explain why shares have fallen so far in the past few months. At three of seven passing grades, Select Comfort’s performance definitely leaves room for improvement. For curious investors, the question is: will that improvement happen in 2013? If not now, when?

Select Comfort’s been tossing and turning uncomfortably all year. Its latest agony, which arrived last month, warned of a short-term sales weakness that resulted in big profit target cuts on Wall Street. Despite the worry, Select Comfort’s forward P/E is an even 10  as of this writing, and could easily slip into single digits on one underwhelming day. Keep in mind, also, that the average $1.85 price target cited last month is still a 35% increase over 2012’s result.