Why Bristow Group's Earnings May Not Be So Hot

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Bristow Group (NYSE: BRS  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Bristow Group burned $304.7 million cash while it booked net income of $130.1 million. That means it burned through all its revenue and more. That doesn't sound so great. FCF is less than net income. Ideally, we'd like to see the opposite.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at Bristow Group look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

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With questionable cash flows amounting to only 0.7% of operating cash flow, Bristow Group's cash flows look clean. Within the questionable cash flow figure plotted in the TTM period above, stock-based compensation and related tax benefits provided the biggest boost, at 4.3% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

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Is Darden 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 Darden Restaurants (NYSE: DRI  ) 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 Darden'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 Darden's key statistics:

DRI Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%	20.2%	Fail
Improving profit margin	(15.3%)	Fail
Free cash flow growth > Net income growth	(43.9%) vs. 1.9%	Fail
Improving EPS	10.5%	Pass
Stock growth (+ 15%) < EPS growth	29.1% vs. 10.5%	Fail

Source: YCharts. * Period begins at end of Q2 (May) 2010.

DRI Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity	(6.1%)	Fail
Declining debt to equity	49.8%	Fail
Dividend growth > 25%	71.9%	Pass
Free cash flow payout ratio < 50%	97.9%	Fail

Source: YCharts. * Period begins at end of Q2 (May) 2010.

How we got here and where we're going
Darden serves up an undercooked appetizer for investors here, earning a rather sad two out of nine passing grades. Underwhelming earnings growth and declining free cash flow do not make a good flavor pairing in this dish. Is there any hope left for Darden today?

Darden has been trying to drive sales with menu changes at its two flagship brands, Olive Garden and Red Lobster. Olive Garden's efforts to put more butts in booths revolve around healthier, protein-packed menu additions. Red Lobster has introduced "Seaside Express" at select restaurants, with facilities similar to fast-casual restaurants.

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These outlets don't have much notable competition in fast casual, as seafood has been rather underrepresented in a niche dominated by Chipotle (NYSE: CMG  ) and other Mexican-themed locales. On the other hand, Red Lobster, despite historically offering a more upscale experience than Chipotle, does not exactly have the same brand cachet with consumers. Full disclosure: I worked my way through college as a Red Lobster server, so my perceptions may be colored by that experience.

Darden will also promote its value offerings with greater promotion across its brands. Olive Garden has reintroduced a buy-one-get-one promotion under the "Dinner Today, Dinner Tonight" tag line, which reinforces and strengthens its entry-level position in the Italian chain hierarchy. In addition to this, a new "Seafood Feast" promotion at Red Lobster will attract more value-conscious customers. A race to the bottom might not be in Darden's best interest -- net income has declined by 10% since the start of 201 and competitor Bloomin Brands (NASDAQ: BLMN  ) of the Carrabba's Italian franchise has suffered even more acutely as its net income has plunged nearly 40% in the same time frame. On the other hand, Chipotle's net income is up nearly 40%, so the fast-casual concept could be big, if Red Lobster can make it work.

Management also plans to reduce capital expenditures in fiscal year 2014 by 10%, to $675 million. Location remodeling in the Olive Garden brand will slow, but 15 new locations are still planned for the fiscal year. Darden has huge cash flow potential from its Specialty Restaurant Group, including Yard House, which is expected to push group sales over the $1 billion mark. This segment has plans to add 150-170 restaurants over the next four to five years. However, if the company neglects the appearance of its flagship brands, that may not offset a diner exodus. No one wants to eat Italian in a dump.

Putting the pieces together
Today, Darden has few 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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Why Energy Transfer Is Poised to Outperform

Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, natural gas transporter Energy Transfer Partners (NYSE: ETP  ) has earned a coveted five-star ranking.

With that in mind, let's take a closer look at Energy Transfer and see what CAPS investors are saying about the stock right now.

Energy Transfer facts

Headquarters (founded)	Dallas (2002)
Market Cap	$19.0 billion
Industry	Oil and gas transportation and storage
Trailing-12-Month Revenue	$25.2 billion
Management	Chairman/CEO Kelsey Warren President/COO Marshall McCrea
Return on Equity (average, past 3 years)	15.5%
Cash / Debt	$528.0 million / $16.9 billion
Dividend Yield	7%
Competitors	DCP Midstream Partners Enbridge Kinder Morgan

Sources: S&P Capital IQ and Motley Fool CAPS.

On CAPS, 98% of the 925 members who have rated Energy Transfer believe the stock will outperform the S&P 500 going forward.

Just last week, one of those Fools, DJRRYAN, succinctly summed up the Energy Transfer bull case for our community:

Pipeline fee based operations provide both a high barrier to competition, as well as a degree of separation from the cost fluctuation of the materials transported. Also, if you believe as I do that the US economy is in a long term growth trend combined with the potential of dramatically reducing our energy dependency on global conflict zones, then it seems to me that investing in pipelines is the place to be for the next five years.

Of course, there are many different ways to play the energy sector, and The Motley Fool's analysts have uncovered an under-the-radar company that's dominating its industry. This company is a leading provider of equipment and components used in drilling and production operations, and poised to profit in a big way from it. To get the name and detailed analysis of this company that will prosper for years to come, check out the special free report: "The Only Energy Stock You'll Ever Need". Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.

In Case You Missed This Week's Dow Earnings: Part 2

This past week, eight of the Dow Jones Industrial Average's (DJINDICES: ^DJI  ) 30 components reported earnings: McDonald's, DuPont (NYSE: DD  ) , AT&T, Travelers (NYSE: TRV  ) , United Technologies, Caterpillar (NYSE: CAT  ) , Boeing, and 3M (NYSE: MMM  ) .

In case you missed the releases, let's look at a four of them today and see how they performed during the second quarter of 2013. To learn about the other four, click here.

On Tuesday, DuPont and Travelers both reported results. DuPont was expected to report $10.04 billion in revenue and $1.27 per share in earnings, but it fell short at $9.8 billion and $1.11. The company earned $1.23 per share a year ago, so this was quite the miss. Management has discussed the option of selling or spinning off its chemical business but didn't give investors a time table for that move during the conference call. But despite the poor numbers, the stock managed to rise 0.91% this past week.  

Travelers, meanwhile, posted EPS of $2.13, while Wall Street had been looking for $1.60. Revenue came in at $5.8 billion, just under the $5.9 billion analysts had wanted to see. Travelers announced plans to cut costs by as much as $140 million in the consumer segment as the company realized a 12% decline in auto policies last year and a 9% drop in home insurance. Management explained that consumers are finding it much easier to switch from one insurance company to another to save a few bucks. Shares of Travelers lost 1.25% this past week.  

On Wednesday, Caterpillar disappointed investors after missing on both the top and bottom lines and lowering guidance for the full year. Analysts were expecting revenue of $15.1 billion and EPS of $1.69, and the company missed on both. Sales were reported at $14.6, a 15.8% year-over-year drop, and EPS of $1.45, down 43% from the $2.54 the company reported last year. Management lowered its full-year forecast from $7 per share to $6.50. A slow global economy and weak commodity prices have affected sales, but management has stated that it will focus on cutting costs to help results in the future. Caterpillar lost 4.19% during the past five trading sessions.

And finally on Thursday, 3M released its second-quarter results, which beat slightly on the bottom and just barely missed on the top. Revenue came in at $7.75 billion, while Wall Street was looking for $7.77 billion, and EPS hit $1.71 while expectations had been set at $1.70. Revenue was up 2.9% over the same time frame last year, while EPS was higher by $0.05. Management praised the company's handling of some difficult conditions during the first six months of the year and expects demand to increase during the second half of 2013. The stock shed 1.25% this past week.  

More Foolish insight
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

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