Don't Go With the Flotek

Fellow Fools, I must disagree with you. You have awarded Flotek Industries (NYSE: FTK  ) a top ranking of five stars in Motley Fool CAPS, with approximately 98% of All-Stars making outperform calls. I just don't see it happening.

Sure, I have the benefit of hindsight. The company just slashed its earnings guidance and the shares took a dive. But this little plunge invited a closer look at the company behind the stock. I do not foresee good things for the oilfield equipment and chemicals specialist.

Flotek has expanded at a rapid clip over the past five years, driven by large acquisitions. It's been a capital-intensive expansion, requiring significant debt financing. While revenue growth has compounded at more than 70%, so have capital expenditures. The company's acquisitions have also left so much goodwill (payments in excess of the fair value of assets) on the balance sheet that this line item accounts for over half of total assets. The company's tangible book value is negative.

This goodwill situation might be understandable in a cutting-edge technological field where Flotek is top dog. But the company operates as a small competitor in a fiercely competitive and rather commoditized space. Rival oilfield servicers like Schlumberger (NYSE: SLB  ) , Halliburton (NYSE: HAL  ) or Baker Hughes (NYSE: BHI  ) could roll over and squish Flotek in the night. Given that the firm is spending only around $1 million per year on R&D, I don't see the company out-innovating its peers, unless its acquisitions are way more game-changing than they look.

There's no shame in growth by acquisition, if done right. National Oilwell Varco (NYSE: NOV  ) is a top example of an efficiency wringing, oilfield services sponge. Flotek just doesn't appear to be executing on that level, and it also doesn't have a chance of becoming a dominant player such as NOV has become in the rig-building game. Those companies are already entrenched.

Here's an example. Flotek cites price-cutting in the rental tools business as a source of margin pressure. The aforementioned competitors are not about to let a little price war shake them out of the space. This detrimental activity has to hurt Flotek, a less diversified entity, more than it hurts someone like Baker Hughes.

My CAPS compadres may ultimately prove me wrong -- it certainly wouldn't be the first time. But for now, I'm not going with the flow. Join the conversation on Flotek with a pick or pan of your own by clicking right here.

Related Foolishness:

• Halliburton's headed deeper.
• Schlumberger is the majordomo of oilfield services.
• Baker Hughes is exceeding (low) expectations.