Sinopec Shanghai Petrochemical Co. (ADR) (SHI): Is Chesapeake Energy Corporation (CHK) 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 Chesapeake Energy Corporation (NYSE:CHK) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Chesapeake Energy (CHK)

What we’re looking for
The graphs you’re about to see tell Chesapeake’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 Chesapeake’s key statistics:

CHK Total Return Price Chart

CHK Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 59.9% Pass
Improving profit margin 130.5% Pass
Free cash flow growth > Net income growth 165.5% vs. 83.9% Pass
Improving EPS 84.7% Pass
Stock growth + 15% < EPS growth (19.3%) vs. 84.7% Pass

Source: YCharts. * Period begins at end of Q4 2009.

CHK Return on Equity Chart

CHK Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 86.7% Pass
Declining debt to equity (29.2%) Pass
Dividend growth > 25% 16.7% Fail
Free cash flow payout ratio < 50% 4.2% Pass

Source: YCharts. * Period begins at end of Q4 2009.

How we got here and where we’re going
I have to admit to surprise at Chesapeake Energy Corporation (NYSE:CHK)’s near-flawless performance. With a free cash flow payout ratio this low, there’s easily room to push the dividend higher and earn a perfect score — but there are a few major roadblocks that might prevent Chesapeake from making progress on these metrics through the rest of 2013. Let’s take a look at what Chesapeake faces this year as it struggles to regain profitability (positive momentum from a big 2009 hole notwithstanding).