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 National Oilwell Varco (NYSE:NOV) 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 National Oilwell Varco'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 National Oilwell Varco's key statistics:

NOV Total Return Price Chart

NOV Total Return Price data. Source: YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

90.2%

Pass

Improving profit margin

(23.2%)

Fail

Free cash flow growth > Net income growth

140.5% vs. 46.1%

Pass

Improving EPS

43.4%

Pass

Stock growth (+ 15%) < EPS growth

0.2% vs. 43.4%

Pass

Source: YCharts. * Period begins at end of Q1 2011.

NOV Return on Equity (TTM) Chart

NOV Return on Equity (TTM) data. Source: YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

3.6%

Pass

Declining debt to equity

215.9%

Fail

Dividend growth > 25%

136.4%

Pass

Free cash flow payout ratio < 50%

16.2%

Pass

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
We first looked at National Oilwell Varco last year, and it has put together an impressive performance in its second go-around by racking up seven out of nine possible passing grades. This turnaround comes largely from a spike in Varco's free cash flow growth, which is as strong this year as it was weak last time. This leaves plenty of space for dividend growth at a reasonable free cash flow payout ratio. However, Varco's profit margin continues to slump in the face of poor returns from its distribution business. Can Varco's new CEO Clay Williams keep the drilling equipment specialist on the right track in a fast-growing but constantly changing oil and gas exploration industry? Let's dig a little deeper to find out.

Earlier this week, Varco topped Wall Street's estimates for both revenue and earnings per share in its first quarter results. Oil companies have been increasing their exploration investments to keep production levels stable amid the ongoing drawdown of many oil fields around the world. The company's rig technology division also boasts a record $16 billion backlog for capital-equipment orders -- 27% higher than it was a year ago -- which should drive consistent revenue growth for the next few quarters. However, investors aren't satisfied with "pretty good" and have decided to jump ship in droves, punishing Varco's shares after the earnings release. Fool analyst Jason Moser highlights Varco's impending spinoff of its equipment-distribution business as DistributionNow, which should help unlock shareholder value and achieve better profit margins in the near term.

Foolish energy specialist Adam Galas notes that demand for oil is expected to reach 182 million barrels per day by 2050, driven by economic growth in developing nations -- particularly India and China -- and increasing global population. In addition, Morgan Stanley and Rystad Energy estimate that oil prices will range between $125 and $150 per barrel by 2035. With oil prices likely to rest at their historic highs (at least in nominal terms) for the long term, National Oilwell Varco should benefit enormously from an anticipated spending spree worth hundreds of billions of dollars in new production infrastructure investment. According to the Interstate National Gas Association of America, total energy infrastructure spending is slated to reach $641 billion by 2035, including more than $272 billion to build new oil infrastructure in the United States.

Going forward, Varco sees long-term opportunities in the waters off Africa's coast, as well as in the Russian Arctic. The company also plans to standardize its equipment and infrastructure, which will help its customers keep costs down without sacrificing timeliness when replacing parts. On the other hand, Varco could still face serious threats from rival oil-field equipment specialist Cameron International (NYSE:CAM), which recently sold its reciprocating compression segment to focus on its core oil and gas markets.

Putting the pieces together
Today, National Oilwell Varco 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.

Alex Planes has no position in any stocks mentioned. The Motley Fool recommends and owns shares of National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.