Is Schlumberger 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 Schlumberger (NYSE: SLB  ) 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 Schlumberger'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 Schlumberger's key statistics:

SLB Total Return Price Chart

SLB Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

95.1%

Pass

Improving profit margin

2.4%

Pass

Free cash flow growth > Net income growth

91.9% vs. 99.8%

Fail

Improving EPS

80.4%

Pass

Stock growth (+ 15%) < EPS growth

54.4% vs. 80.4%

Pass

Source: YCharts. * Period begins at end of Q2 2010.

SLB Return on Equity Chart

SLB Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

8%

Pass

Declining debt to equity

200%

Fail

Dividend growth > 25%

48.8%

Pass

Free cash flow payout ratio < 50%

37.4%

Pass

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
Schlumberger got off to a good start, but was tripped on what largely amounts to technicalities to finish with seven of nine passing grades. The company's free cash flow growth, which had been anemic, shot back up over the past few quarters to pull nearly even with net income. A strong showing in the year to come on this metric could easily win the company another pass. However, will this progress continue, or is Schlumberger bound for a period of heightened spending? Let's dig a little deeper to find out.

This far, Schlumberger has done a good job limiting its exposure to any one region by diversifying into many international markets. My Foolish colleague Matt DiLallo notes that both Schlumberger and its rival Halliburton (NYSE: HAL  ) have been counting on overseas business due to poor market conditions in North America. Schlumberger has been pushing hard into Chinese oilfields, and it now holds a 20% stake in one Chinese services company. In addition, Schlumberger has agreed to set up a joint venture called OneSubsea with Cameron International (NYSE: CAM  ) to capitalize on the growing offshore oil and gas market.

Last quarter, rig counts in the U.S. dropped more than 3%, impeding the growth of these two drilling-dependent companies. Halliburton, at the least, received $637 million in compensation for the 2010 Gulf disaster, which has helped it to rebound somewhat. It's probably better if Schlumberger avoids such disasters entirely, but Halliburton shares have produced twice the total return as its rival's over the past three years. On the other hand, Schlumberger currently trades at a P/E of 18, which seems to be a decent bargain compared to Halliburton's P/E of 21.

Putting the pieces together
Today, Schlumberger has many 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.

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