Has Flotek 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 Flotek (NYSE: FTK  ) 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 Flotek.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

16.0%

Pass

 

1-Year Revenue Growth > 12%

34.4%

Pass

Margins

Gross Margin > 35%

42.5%

Pass

 

Net Margin > 15%

8.9%

Fail

Balance Sheet

Debt to Equity < 50%

43.4%

Pass

 

Current Ratio > 1.3

1.34

Pass

Opportunities

Return on Equity > 15%

27.0%

Pass

Valuation

Normalized P/E < 20

18.47

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

7 out of 10

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

Since we looked at Flotek last year, the company has gained two full points, with a lot of work on getting its balance sheet in order and a big jump in return on equity. The success has helped push the stock price up about 20% over the past year.

Flotek is primarily an oil services company, supplying chemicals and drilling equipment to oil and gas exploration and production companies. It also has a line of pumps and related products to assist with coal-bed methane production.

Flotek and its peers have had to struggle with rock-bottom natural gas prices, with Baker Hughes (NYSE: BHI  ) in particular seeing weakness in its stock price throughout the year. But with exposure to both oil and gas drilling, Flotek has been able to use diversification as a buffer against the weak natural gas market.

Moreover, Flotek has a presence in some promising markets. It started shipments of chemicals to Russia earlier this year, where ExxonMobil (NYSE: XOM  ) and other companies have sought to take advantage of Russia's mineral wealth. It's also aiming to focus on areas like the Bakken for its drilling motors, and with Exxon and Statoil (NYSE: STO  ) among the major players in that region, Flotek shouldn't have any shortage of potential customers.

In its most recent quarter, Flotek disappointed investors with a 45% drop in net income. With Schlumberger (NYSE: SLB  ) and other major oil services firms managing to post slightly better-than-expected earnings, Flotek's shares took a big hit.

For Flotek to improve, it needs its growth initiatives to pay off sooner than later. If energy prices recover from recent lows, it'd be a good sign for the stock to move higher as well.

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.

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


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