Has Weatherford Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Weatherford (NYSE: WFT  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Weatherford.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

15.1%

Pass

 

1-Year Revenue Growth > 12%

21.5%

Pass

Margins

Gross Margin > 35%

25.9%

Fail

 

Net Margin > 15%

1.6%

Fail

Balance Sheet

Debt to Equity < 50%

74.3%

Fail

 

Current Ratio > 1.3

1.95

Pass

Opportunities

Return on Equity > 15%

2%

Fail

Valuation

Normalized P/E < 20

33.58

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

When we looked at Weatherford last year, it scored just two points, so the company has made some progress in the past year. Renewed revenue growth has made a big difference, but the company is still struggling with razor-thin margins and a decent-sized debtload.

This time last year, the oil services industry was still reeling from the impact of the BP oil spill. Not only was Halliburton (NYSE: HAL  ) directly affected by its connection to the Macondo well, but the moratorium on deepwater permits and near-shutdown in drilling activity hurt everyone from industry giant Schlumberger (NYSE: SLB  ) on down to smaller competitors Baker Hughes (NYSE: BHI  ) and Weatherford.

But the industry has turned the tide. In their most recent quarters, these companies all posted strong results, reflecting not only restored activity in the Gulf of Mexico but also huge expansion worldwide. For Weatherford, political unrest in northern Africa and the Middle East hurt its production levels there, but Latin America, western Africa, and Russia all helped push growth higher. Expectations of improving margins and higher sales growth didn't hurt the shares either.

Unfortunately, one thing that stands out against Weatherford is its lack of a dividend. All three of the competitors listed above make payouts to shareholders.

Whether Weatherford reaches perfection will depend on if it can compete not only with its traditional rivals but also with up-and-comers like CGG Veritas (NYSE: CGV  ) and Newpark Resources (NYSE: NR  ) . Weatherford still has a long way to go, but signs look good that the company is on the right path.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Weatherford to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Schlumberger and CGG Veritas. 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 Fool has a disclosure policy.


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