Is Weatherford 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 Weatherford (NYSE: WFT  ) 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 Weatherford'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 Weatherford's key statistics:

WFT Total Return Price Chart

WFT Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

66.7%

Pass

Improving profit margin

62.3%

Pass

Free cash flow growth > Net income growth

(114.9%) vs. 37.3%

Fail

Improving EPS

41%

Pass

Stock growth (+ 15%) < EPS growth

13.5% vs. 41%

Pass

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

WFT Return on Equity Chart

WFT Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

31.3%

Pass

Declining debt to equity

59.3%

Fail

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

How we got here and where we're going
Weatherford started off on a solid note, but it's had difficulties improving its free cash flow -- a weakness that appears to be partially behind the consistent growth of debt. Despite these related shortfalls, Weatherford still mustered five out of seven passing grades, and it could certainly gain a perfect score if free cash flow finally nudges into positive territory. But how possible is that? Let's dig a little deeper to find out.

Falling natural gas prices have forced many North American oil and gas companies to shift their focus toward the production of crude oil and natural gas liquids. However, the oil drilling rig counts have been declining in recent months, but crude oil production has continued to rise.

In fact, Weatherford technology might be at least partly responsible for the rig-count drop: Fool contributor Arjun Sreekumar notes that Weatherford's Microflux control system provides a competitive advantage over rival Schlumberger (NYSE: SLB  ) , and it has effectively reduced the number of drilling days from 31 to 16 in Forest Oil's Haynesville Shale holdings. Oil-field services companies are aggressively investing in R&D to build more efficient drilling equipment. Weatherford's $270 million in trailing 12-month R&D spending can't match Schlumberger's $1.2 billion in spending over the same period. As a smaller player, Weatherford will have to spend smarter, and Microflux is certainly a step in the right direction.

The recent shale-gas boom in China also offers more lucrative opportunities for services like Weatherford and Schlumberger. Schlumberger has recently partnered with China National Petroleum to build a shale gas pipeline in the country, but Weatherford's opportunity remains largely unexplored. However, Weatherford may want to tread carefully in the Middle Kingdom -- Fool analyst Taylor Muckerman points out that the SEC has launched an investigation against the company for potentially selling goods to Iran and Syria in 2012. The company has also been found to have taken a few improper liberties with its contracts with Iraq.

Putting the pieces together
Today, Weatherford 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.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 05, 2013, at 12:55 PM, hanover67 wrote:

    WFT has had so many mis-steps in the past several years that it rates a "wait and see" approach on my part, i.e. hold - because i own it. My average cost is $14.97 with lots ranging from $20.03 to $9.60, so I'm back above water. For a long time I regarded continuing to hold it as denial rather than a strategy, but it may pay off. WFT has certainly been a laggard in the oilfield service business, Management claims it is now "focused" on its core businesses. I hope so...

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