Is BP plc (ADR) (BP) 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 British Petroleum 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 BP plc (ADR) (NYSE:BP)‘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 BP plc (ADR) (NYSE:BP)’s key statistics:

BP Total Return Price data by YCharts

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	47.5%	Pass
Improving profit margin	(24%)	Fail
Free cash flow growth > Net income growth	(124.7%) vs. (12.1%)	Fail
Improving EPS	10.5%	Pass
Stock growth (+ 15%) < EPS growth	(20.2%) vs. 10.5%	Pass

Source: YCharts.
*Period begins at end of Q1 2010.

BP Return on Equity data by YCharts

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(7.4%)	Fail
Declining debt to equity	15.7%	Fail
Dividend growth > 25%	28.6%	Pass
Free cash flow payout ratio < 50%	Negative FCF	Fail

Source: YCharts.
*Period begins at end of Q1 2010.

How we got here and where we’re going
BP plc (ADR) (NYSE:BP) doesn’t quite come through with flying colors, as it’s only earned four out of nine possible passing grades. A big source of weakness is the company’s falling free cash flow, which has diverged markedly from its net income over the past three years, and which may not be able to support its current dividend payouts if the trend continues. Will BP plc (ADR) (NYSE:BP) be able to move past this problem, or is the oil and gas supermajor going to be tarnished for some time to come? Let’s dig a little deeper.

All of the major oil and gas companies have been at the mercy of sluggish economic growth and dwindling global demand for their products, and BP is certainly no different. Global energy  consumption grew by only 1.8% in 2012, well below the 10-year average of 2.6%. Emerging market economy demand, which has been typically driving consumption growth, is now almost exclusively dependent on China and India; together, the demand from these two countries accounted for almost 90% of the global increase last year.