Halliburton Company (HAL), Cameron International Corporation (CAM): Is Schlumberger Limited. (SLB) Destined for Greatness?

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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 Limited. (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 Limited. (NYSE:SLB)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: are profits, margins, and free cash flow all increasing?
2). Valuation: is share price growing in line with earnings per share?
3). Opportunities: is return on equity increasing while debt to equity declines?
4). Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s take a look at Schlumberger Limited. (NYSE:SLB)’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 Limited. (NYSE:SLB) 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 Limited. (NYSE:SLB) 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 Company (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 Corporation (NYSE:CAM) to capitalize on the growing offshore oil and gas market.

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