Is Atwood Oceanics' 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 Atwood Oceanics (NYSE: ATW  ) 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 Atwood'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 Atwood's key statistics:

ATW Total Return Price Chart

Source: ATW Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

44.9%

Pass

Improving profit margin

(27.1%)

Fail

Free cash flow growth > Net income growth

(932.8%) vs. 16.8%

Fail

Improving EPS

14.6%

Pass

Stock growth (+ 15%) < EPS growth

37.6% vs. 14.6%

Fail

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

ATW Return on Equity Chart

Source: ATW Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(35.3%)

Fail

Declining debt to equity

126.2%

Fail

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

How we got here and where we're going
This isn't a particularly compelling performance for Atwood, which dramatically underperforms oil services company Halliburton (NYSE: HAL  ) on these metrics. Halliburton earned five out of nine passing grades (owing to its dividend), while Atwood musters a mere two. In a more direct comparison, Atwood beats deepwater driller Transocean (NYSE: RIG  ) , which earned only one out of nine passing grades. Are offshore drilling specialists lousy investments in general, or is there something particular to the two we've just examined that makes them lousy?

One red flag for Atwood is the steep drop in free cash flow of recent years, one which isn't mirrored in Transocean's performance on this analysis. The problem with that comparison is that Atwood is much smaller than Transocean, with only 16 offshore rigs and a market cap about a sixth of Transocean's size. Only eight of those rigs were on the water last year, so there's clearly a lot of upside once the new rigs go into service, and the revenue streams of extra rigs could quickly reverse the cash flow bleed.

Fool analyst Jason Moser points out that deepwater services spending will increase at almost 20% per year for some time, which is good news for Atwood as well as for Halliburton, which works with pretty much any rig it can find. Atwood will have to contend with an increasingly crowded offshore space that's gaining new rigs almost by the day. One downside to this stock is its lack of a dividend, which puts it at a disadvantage against many deepwater drilling peers -- particularly Seadrill (NYSE: SDRL  ) , whose yield stands at 9%. Seadrill, like Transocean, is much larger than Atwood, and size does matter when it comes to massive projects of this nature. If the space gets oversaturated, it could wind up hurting Atwood more than its peers.

Putting the pieces together
Today, Atwood has few 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.

If you're an energy investor on the lookout for new opportunities, then you should consider one of the more exciting plays in the space: Seadrill. To help you size up this stock, one of The Motley Fool's top Stock Advisor analysts has authored a premium research report on the company, covering everything from its strengths and weaknesses to what to expect going forward. Simply click here now to claim your copy and determine whether Seadrill deserves a place in your portfolio.

Keep track of Atwood by adding it to your free stock Watchlist.


Read/Post Comments (1) | Recommend This Article (1)

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  • Report this Comment On April 15, 2013, at 8:14 PM, hanover67 wrote:

    I think ATW is a great stock to own because its new rigs will generate rising earnings. Cash flow has been dedicated to newbuilds which are now coming on stream at attractive dayrates. Plus, ATW is selling at a P/E that is half of what it should be and when the market recognizes the earnings potential, that should change and propel the stock price well above its current level.

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