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 Energy Transfer Partners fit the bill? Let's 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 ETP'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 look at ETP's key statistics:


ETP Total Return Price Chart

ETP Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

662.9%

Pass

Improving profit margin

(73.8%)

Fail

Free cash flow growth > Net income growth

(1,170%) vs. 100.1%

N/A

Improving EPS

62.6%

Pass

Stock growth (+ 15%) < EPS growth

37.3% vs. 62.6%

Pass

Source: YCharts.
*Period begins at end of Q3 2010.

ETP Return on Equity (TTM) Chart

ETP Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(7.8%)

Fail

Declining debt to equity

3,980%

Fail

Dividend growth > 25%

1.3%

Fail

Free cash flow payout ratio < 50%

Negative FCF

N/A

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
We first looked at Energy Transfer Partners (ETP) last year, and it has dropped a passing grade in 2013 to finish up with only three out of seven possible passing grades (two are exempted due to the company's corporate structure). ETP's negative free cash flow may seem problematic -- but perhaps not as much as you might think. It's more important to examine distributable cash flow, which is up significantly over the same trailing-12-month period in 2012. According to ETP's reports, its most recent distributable cash flow figures add up to $2.3 billion for the 12 months ended this September, a big 43% improvement over the $1.3 billion reported for the same period in 2012. However, weakening return on equity, a declining profit margin, and skyrocketing debt-to-equity levels all contributed to ETP's failing grades this year. Can ETP improve in 2014? Let's dig a little deeper to find out.

Over the past few quarters, ETP has been streamlining its business portfolio through the divestment of non-core assets, which helped it deliver market-topping third-quarter results. The company has sold off its Missouri Gas Energy and New England Gas Company assets in separate transactions, raising over $1 billion in the process. Fool contributor Aimee Duffy notes that the company has been exploring a spinoff of non-core businesses as MLPs, to keep its focus on producing assets and to obtain substantial tax benefits.

The midstream industry's recent successes have led many companies to ramp up their capital expenditure plans for the upcoming year. ETP itself plans to spend between $2.1 billion and $2.7 billion on large-scale projects, including a $1 billion investment in Sunoco Logistics Partners , which sports a distribution coverage ratio of 1.84 and debt-to-adjusted EBITDA of just 2.5. Sunoco Logistics may not be as diversified as some larger MLPs, but it expects several major pipeline projects -- Permian Express, Allegheny Access and Granite Wash Extension -- to be online through 2014.

Lone Star NGL, a joint venture between ETP and Regency Energy Partners, recently expanded the fractionation capacity at its facility in Mont Belvieu, which could help to widen its footprint in energy-producing regions and to capture new avenues for organic growth. Aimee Duffy notes that NGL processing capacity at the facility has grown by 4.7 billion cubic feet per day since 2010. This gives ETP more muscles to flex in the booming Eagle Ford shale. ETP's got several other projects in the pipeline as well, including the Trunkline crude oil conversion facility and the Mariner South NGL facility, which are both expected to be online by the end of 2015.

Putting the pieces together
Today, Energy Transfer Partners has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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The article Is Energy Transfer Partners Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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