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 (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:
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.
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 (HAL 1.11%) 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 (RIG 2.16%), 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 (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.
