Halliburton: Profitability Analysis

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 |  About: Halliburton Company (HAL)
by: Jeff Williams

Looking at profitability is a very important step in understanding a company. Profitability is essentially why the company exists and a key component in deciding whether to invest or to remain invested in a company. There are many metrics involved in calculating profitability, but for this article, I will look at Halliburton Company's (NYSE:HAL) earnings and earnings growth, profit margins, profitability ratios and cash flow.

Through the above-mentioned metrics, we will get an idea about the company's profitability over the past 5 years and a look at what to expect in the future.

By comparing this summary to other companies such as Schlumberger NV (NYSE:SLB) and Baker Hughes Inc. (NYSE:BHI), which are in the same sector, you will be able see which has been the most profitable.

All material is sourced from Morningstar, MSN Money and Haliburton Company's webpage.

Earnings and Earnings Growth

1. Earnings = Sales x Profit Margin

  • 2010 - $17.973 billion x 10.21% = $1.835 billion
  • 2011 - $24.829 billion x 11.43% = $2.839 billion
  • 2012 TTM - $28.277 billion x 10.16% = $2.872 billion

Halliburton's earnings have increased from $1.835 billion in 2010 to $2.872 billion in 2012 TTM. This is a increase of 56.51%.

2. Five-year historical look at earnings growth

  • 2008 - $1.538 billion, 56.04% decrease over 2007
  • 2009 - $1.145 billion, 25.55% decrease
  • 2010 - $1.835 billion, 60.26% increase
  • 2011 - $2.839 billion, 54.71% increase
  • 2012 TTM - $2.872 billion, 1.16% increase

In looking at Halliburton's earnings over the past five years, you can see how the economic crisis affected the company's earnings.

In 2009, Halliburton reported it's low in earnings compared to the last 5 years. This decrease was due to the "response to the global recession, demand for oil and natural gas weakened, reducing global drilling activity and causing customers to change their priorities."

Since 2009, As the economy and commodity prices have been recovering, this has been reflective in the company's earnings. Since the low in 2009, the company's earnings have increased by 150.83%.

Profit Margins

3. Gross Profit = Total Sales - Cost of Sales

In analyzing a company, gross profit is very important because it indicates how efficiently management uses labor and supplies in the production process. More specifically, it can be used to calculate gross profit margin. Here are Halliburton's gross profits for the past two years:

  • 2011 - $24.829 billion - $19.811 billion = $5.018 billion
  • 2012 TTM - $28.277 billion - $23.400 billion= $4.877 billion

4. Gross Profit Margin = Gross Income / Sales

The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

In reviewing Halliburton's gross margin over the past five years, we can see that the company's gross margin fell in 2009. The 5-year low for the gross margin was reported in 2009 with a margin of 14.96%. After the crisis in 2009, the high for the margin was reported in 2011. The 2011 margin was reported at 20.21%. The 2012 TTM gross profit margin of 17.25% is below the 5-year average of 18.70%.

  • 2008 - $4.230 billion / $18.279 billion = 23.14%
  • 2009 - $2.196 billion / $14.675 billion = 14.96%
  • 2010 - $3.228 billion / $17.973 billion = 17.96%
  • 2011 - $5.018 billion / $24.829 billion = 20.21%
  • 2012 TTM - $4.877 billion / $28.277 billion = 17.25%

As the gross margin is below the 5-year average this implies that management has been less efficient in the company's manufacturing and distribution during the production process when compared to 2008.

5. Operating income = Total Sales - Operating Expenses

The amount of profit realized from the operations of a business after taking out operating expenses - such as cost of goods sold (COGS) or wages - and depreciation. Operating income takes the gross income (revenue minus COGS) and subtracts other operating expenses, then removes depreciation. These operating expenses are costs that are incurred from operating activities and include things such as office supplies and heat and power.

  • 2011 - $4.737 billion
  • 2012 TTM - $4.608 billion

6. Operating Margin = Operating Income / Total Sales

Operating margin is a measure of the proportion of a company's revenue that is left over after paying for variable costs of production, such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs such as interest on debt. If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.

Compared to 2008, the operating margin has decreased. In 2008, the company reported an operating margin of 21.94%. In 2012 TTM, the company reported an operating margin of 16.30%. Since 2009, the operating margin has bounced between 13.59% and 19.08%.

  • 2008 - $4.010 billion / $18.279 billion = 21.94%
  • 2009 - $1.994 billion / $14.675 billion = 13.59%
  • 2010 - $3.009 billion / $17.973 billion = 16.74%
  • 2011 - $4.737 billion / $24.829 billion = 19.08%
  • 2012 TTM - $4.608 billion / $28.277 billion = 16.30%

The 2012 TTM operating margin of 16.30% is below the 5-year average of 17.53%. This implies that there has been less of a percentage of the total sales left over after paying for variable costs of production such as wages and raw materials compared to the 5-year average.

7. Net Profit Margin = Net Income / Total Sales

The net profit margin is a ratio of profitability calculated as net income divided by revenue, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.

Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage - a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.

Over the past 3 years, Halliburton's net profit margin has revealed strength compared to 2009 and 2008. The latest net profit margin of 10.16% is above the 5-year average of 9.60%.

  • 2008 - $1.538 billion / $18.279 billion = 8.41%
  • 2009 - $1.145 billion / $14.675 billion = 7.80%
  • 2010 - $1.835 billion / $17.973 billion = 10.21%
  • 2011 - $2.839 billion / $24.829 billion = 11.43%
  • 2012 TTM - $2.872 billion / $28.277 billion = 10.16%

As the 2012 TTM net profit margin of 10.16% is above the 5-year average of 9.60%, this implies that there has been an more of the percentage of earnings that the company is able to keep compared to the company's 5-year average.

The above listed profitability margins are revealing that the company has been showing weakness when compared to 2008 but has been gaining strength when compared to 2009. This gives an idea of how the financial crisis affected Halliburton, but it also shows how the company is recovering.

Profitability Ratios

8. ROA - Return on Assets = Net Income / Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

When comparing Halliburton's 2012 TTM ROA to its 2009 ROA, we can see that the percentage of return on assets is significantly higher. The current ROA of 10.92% is above the 2009 ROA of 6.92%.

  • 2008 - $1.538 billion / $14.385 billion = 10.69%
  • 2009 - $1.145 billion / $16.538 billion = 6.92%
  • 2010 - $1.835 billion / $18.297 billion = 10.01%
  • 2011 - $2.839 billion / $23.677 billion = 11.99%
  • 2012 TTM - $2.872 billion / $26.312 billion = 10.92%

As the 2012 TTM ROA of 10.92% is above the 5-year average of 10.10%, this implies that management has had more of the ability to use the company's assets to generate earnings compared to the average of the last 5 years.

9. ROE - Return on Equity = Net Income / Shareholders' Equity

As shareholders' equity is measured as a firm's total assets minus its total liabilities, ROE reveals the amount of net income returned as a percentage of shareholders' equity. The return on equity measures a company's profitability by revealing how much profit it generates with the amount shareholders have invested.

  • 2008 - $1.538 billion / $7.725 billion = 19.91%
  • 2009 - $1.145 billion / $8.728 billion = 13.12%
  • 2010 - $1.835 billion / $10.373 billion = 17.69%
  • 2011 - $2.839 billion / $13.198 billion = 21.51%
  • 2012 TTM - $2.872 billion / $15.168 billion = 18.93%

Much like the ROA, the ROE has also revealed significant strength when compared to 2009. When comparing the 2009 to the 2012 TTM ROE, we can see that the percentage has strengthened. The 2009 ROE of 13.12% is much lower than the current ROE of 18.93%. As the ROE has strengthened over the past four years, this reveals that there has been an increase in how much profit has been generated compared to the amount that shareholders have invested.

Cash Flows

10. Free Cash Flow = Operating Cash Flow - Capital Expenditure

A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (NYSE:FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.

It is important to note that negative free cash flow is not bad in itself. If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.

When reviewing the company's free cash flow, we can see that in all but one of the past five years, Halliburton's free cash flow has been negative.

  • 2008 - $3.684 billion - $2.953 billion = $731 million
  • 2009 - $734 million - $782 million = $(48) million
  • 2010 - $1.135 billion - $1.651 billion = $(516) million
  • 2011 - $1.913 billion - $2.519 billion = $(606) million
  • 2012 TTM - $3.231 billion - $3.308 billion = $(125) million

11. Cash Flow Margin = Cash Flow from Operating Activities / Total Sales

The higher the percentage, the more cash available from sales.

If a company is generating a negative cash flow, it shows up as a negative number in the numerator in the cash flow margin equation. This means that even as the company is generating sales revenue, it is losing money. The company will have to borrow money or raise money through investors in order to keep on operating.

As Halliburton's cash flow margin is positive, it does not have to take the above measures to continue operating.

  • 2008 - $3.684 billion / $18.279 billion = 20.15%
  • 2009 - $734 million / $14.675 billion = 5.00%
  • 2010 - $1.135 billion / $17.973 billion = 6.32%
  • 2011 - $1.913 billion / $24.829 billion = 7.70%
  • 2012 TTM - $3,231 billion / $28.277 billion = 11.42%

Summary

Since 2008, the company's earnings have increased significantly. In 2009, the company reported its 5-year low in earnings. Since 2009, as the demand for oil and natural gas began to improve, the company reported a significant increase in earnings. This increase in demand has responded in a strong rebound since the economic crisis of 2008/2009.

The listed profitability margins are revealing that the company has been showing weakness when compared to 2008 but has been gaining strength when compared to the low in 2009.

Much like the ROA, the ROE has also revealed significant strength when compared to 2009. When comparing the 2012 TTM ROE to the 2009's ROE, we can see that the percentage has gained significantly. The 2009 ROE of 13.12% is much lower than the current ROE of 18.93%. As the ROE has increased over the past four years, this reveals that there has been an increase in how much profit has been generated compared to the amount that shareholders have invested.

Over the past 5 years, Halliburton has posted negative cash four times. The company is generating positive cash but is using its cash to purchase assets. As the company is generating positive cash, this implies that the company does not have to borrow money or raise money through investors to keep operating.

Looking forward:

In 2013, Halliburton is looking at growth ahead. According to the latest Q3 report, Halliburton is anticipating strong energy demand. This increase in energy demand will increase the need for oil and gas service companies such as Halliburton, Schlumberger , Baker Hughes , Weatherford International (NYSE:WFT) and supply companies such as National Oilwell Varco Inc. (NYSE:NOV) and Cameron Internation (NYSE:CAM).

Over the next few years, analysis at Bloomberg Businessweek are predicting an increase in revenue in FY 2012 and revenue growth in 2013. Analysts are estimating revenues for FY 2012 at $28.3 billion and a revenue for 2013 at $29.2 billion.

For another article on Halliburton please read: Analyzing Halliburton's Debt And Risk.

For an excellent article on Energy read: The Best-Positioned Companies For 2013: Phil Weiss

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.