A Stock Worth Splurging On
Sometimes paying a little extra for a top company is the best decision to make when choosing between investments.
This is particularly true in the case of Schlumberger Ltd. (SLB), an oil and gas equipment and services supplier. Currently trading at 14.22 times forward earnings, direct competitors like Halliburton (HAL) (P/E: 11.10) and Baker Hughes (BHI) (P/E: 11.62) are priced at slight discounts to SLB.
However, Schlumberger’s market cap of $107.88 billion, dominant market position and solid financials are worth paying a little extra for.
The company’s operating margin of 0.18 doubles that of Baker Hughes and has a sizeable advantage on Halliburton, which has an operating margin of 0.11.
Such a noticeable advantage is paramount today for oil companies as we’re seeing the prices of crude spike and stabilize at three-digit levels, which affects these companies’ revenue and bottom lines.
Furthermore, a positive trend has emerged among oilfield service providers this earnings season. And Schlumberger has led the way, topping Wall Street expectations with an 8% increase in revenue.
More growth is projected for the rest of the year, as well. Revenue is projected to increase 8.30%.
All in all, SLB reported earnings of $1.57 per share, topping analyst estimates of $1.10. That’s part of the reason why the stock is so pricey right now.
Shares soared 5% the morning after Schlumberger reported earnings, establishing a new 52-week high of $85.02.
The Middle East and Asia have done particularly well for SLB. Sales in that segment surged 11% to $2.7 billion. Improving performance across the globe has allowed Schlumberger to fortify its solid balance sheet, leading to several important new developments.
For one, SLB plans to complete a $10-billion share repurchase program over the next five years. Massive share buybacks are no stranger to Schlumberger. In fact, it just completed an $8-billion buyback this year that was initially approved in April 2008. Needless to say, management feels this will add shareholder confidence in the firm’s financial stability and create extra value for its owners.
Indeed, SLB is determined to show shareholders that it’s committed to returning value. So it’s likely to increase its quarterly dividend, which is currently 1.50% annually.
Still, there remains a definite focus on growth. And that’s evidenced by the company’s acquisition strategy. Schlumberger has been targeting small software companies that provide deeper technological insights into oilfield information. Management believes this will give the company an edge over competitors and help lock in big contracts with national oil companies.
This will be particularly useful in places like Mexico and Russia. Schlumberger is the project manager of oilfields in both countries, shooting seismic and drilling wells among other operations. Consequently, their productivity is increasing. Offshore activity in the Gulf of Mexico was up 26% last year.
Clearly SLB is on top of its game, and its growth and productivity are evidence of that.
While high oil prices are contributing to favorable outlooks for many companies, I believe Schlumberger is one of the better bets in the market.
I expect the stock to continue to gain momentum. The mean analyst target is currently $96 per share – an 18% premium to the stock’s current price.
And “the chase” continues,