Last close: $26.08
Weatherford operates in an attractive industry (oilfield services). Other than that, there is little that is attractive about this company.
Weatherford is positioned as a growth company, but it seems to be pursuing growth for growth’s sake without regard for capital efficiency. The company has grown as “a result of internal growth and innovation as well as the consolidation of more than 250 strategic acquisitions”.
- It is difficult to see how 250 acquisitions can be strategic.
- However, some serial acquirers are indeed valuable businesses because they utilize capital efficiently. Unfortunately, Weatherford’s management has a bad track record in deploying capital (~8.5% ROCE over the last 7 years) and financing capital needs (~10-11% ROE over the last 7 years).
Weatherford’s profitability is average for an industrial company (~30% gross margin), and its asset returns are poor (~5.5% over the last 7 years).
- This means that Weatherford is either incapable (i.e. its products are not uniquely attractive enough for customers to pay up, and its presence in Iraq etc. does not mean anything) or incompetent (i.e. management is unable to extract value for shareholders despite unique products).
Weatherford’s cash flow management is also very poor.
- Working capital cash cycle is ~158 revenue days. That means that it takes the company ~5 months to convert $1 of revenue into $1 of cash!
- The company has required financing to fund cash outflows in at least 15 of 20 most recent quarters, as capital expenditure has exceeded operating cash flow. Unsurprising then, that leverage has increased significantly.
Management’s incentives are not aligned with shareholders.
- Management owns less than 0.3% of the company (or ~1% after including all deferred compensation), and was paid ~$46 m in total in 2009 (Mr. Duroc-Danner, Chairman & CEO, made ~$16 m in that year).
Finally, the company reports that it is under investigation in the US for trade sanction law, Foreign Corrupt Practices Act and other federal statues violations.
Weatherford’s shares have increased 66% in the last 6 months, when there was alleged general selling pressure on oil & gas stocks due to BP’s Gulf of Mexico oil spill. Investors who bought at the time have already made good money; but since there was no margin of safety in the valuation 6 months ago, the stock must surely be overvalued now.
- Weatherford is trading at ~12.5x trailing EBITDA, ~2 x book value and has never paid a dividend.
- These valuation levels imply that the company will grow its cash flow generation at least 10% in perpetuity, which is obviously impossible.
- Finally, adjusting for the 2:1 split in May 2008, the stock is above its all time high.
29 of 30 Wall Street analysts rate this stock as a Buy or Hold. Management’s plans to grow further internationally will doubtless include more acquisitions.
Investors should be asking WTF?
