The Case for Shorting Weatherford International

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Weatherford International (NYSE: WFT). Is this provider of equipment and services for oil and gas exploration the real thing? Let's get right to the numbers.

Foolish facts

Data current as of Dec. 11.

Though more Fools like National Oilwell Varco (NYSE: NOV) than peer Weatherford, those who've rated the latter stock to outperform in CAPS still tend to feel strongly about its prospects.

"Has a wide-range of quality expertise in an industry that will see no fall in demand in the near future. Their recent addition of Oiltracers LLC only adds to the immense professionalism and effectiveness of this company," wrote Foolish investor ahmccaffrey in mid-October.

A 26% rally in the stock over the past three months suggests more than a few investors share this bullish view. But is it justified? Weatherford doesn't make much hay about its prospects, but the company does supply a good number of international oil explorers. Brazil's Petrobras (NYSE: PBR), for example. Trouble is, Weatherford's customer list makes it look like the JV player when compared to the varsity-sized group National Oilwell Varco serves, which includes both ExxonMobil and Marathon Oil.

The elements of growth

Source: Capital IQ, a division of Standard & Poor's.

Color me unimpressed. Weatherford's financials fall far short of what I want to see as a business-focused growth investor. Let's review:

• Revenue has grown inconsistently yet normalized net income is declining at a faster pace. More revenue, less profit. Sounds to me like a really bad light beer commercial.
• Worse, gross margins have taken a huge hit over the past two years. Weatherford may be cutting prices in order to generate sales.
• Management may also be extending unsustainable terms. Receivables have risen faster than revenue in each of the past three fiscal years. Combined, these trends are bound to crimp cash flow.
• And that appears to be exactly what's happening. Up until the past 12 months, Weatherford had been burning through hundreds of millions in cash. Management has compensated by issuing new debt to fund the business.

Competitor and peer checkup

Source: Capital IQ, a division of Standard & Poor's. Data current as of Dec. 11.

There isn't much to like about any of the companies in this table. Given Weatherford's financials, I can't say I'm surprised.

Grade: Unsustainable
Call it a case of a good industry hosting a bad stock. Sure, Weatherford's customer list ensures it'll be around for decades. So what? The company will have to borrow to grow.

I prefer investing in businesses that fund growth organically. The sort of businesses that deserve to trade for 17 times forward earnings. Weatherford doesn't, which is why I've shorted it in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Weatherford International at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

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