Is Halliburton Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Halliburton's (HAL -0.34%) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Halliburton's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Halliburton's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Halliburton's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Halliburton managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Halliburton's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Halliburton's key statistics:

HAL Total Return Price data by YCharts

Source: YCharts. * Period begins at end of Q2 2009.

HAL Return on Equity data by YCharts

Source: YCharts. * Period begins at end of Q2 2009.

How we got here and where we're going
Halliburton turns in a respectable performance, with five out of nine possible passing grades. The oilfield services company's declining free cash flow has hurt its ability to earn a higher score on the dividend analysis as well, since it's been unable to increase dividend payments in light of an abnormally free cash flow payout ratio.

Halliburton's earnings report released today could change this picture somewhat, but there doesn't seem to be any imminent reasons for boom or bust. Rather, investors will be looking toward the movement in a few key trends, particularly the number of operational rigs, and the number of those Halliburton services, for evidence of sustainable growth.

Investors also need to consider the progress that Halliburton's competitors have made. The oilfield chemicals segment recently got new leadership thanks to Ecolab's (ECL 0.16%) acquisitive nature. Ecolab now controls 40% of the oilfield chemicals market -- that is as much as Halliburton, Baker Hughes (BHI), and Schlumberger (SLB 0.08%) put together.

Speaking of Baker Hughes and Schlumberger, our Foolish contributors have recently offered compelling reasons why either of companies might be better-positioned than Halliburton. Schlumberger has the largest R&D budget in the oil services sector, and Baker Hughes has a much better stock price upside, according to my fellow Fool Robert Eberhard's Graham number calculations.

Halliburton's fighting back with a leadership role in the advancement of fracking technology, which is a great advantage as long as public sentiment doesn't flare up and force a government clampdown. At the moment, that seems an unlikely possibility. Focusing on unconventional sources on land is a good move, as dry land drilling is still much easier to accomplish than deepwater extraction. Even so, Halliburton has interests in both fields, as the catastrophic BP (BP 0.98%) Deepwater Horizon disaster made apparent. Speaking of that disaster, Halliburton's court battle with BP seems to be moving toward a successful resolution, which could ignite renewed investor interest as the legal storm clouds finally lift.

Putting the pieces together
Halliburton 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.