Schlumberger (SLB) has its earnings conference call scheduled for 9:00 AM ET this Friday. The company has a track record of beating the analysts' consensus estimate, having done so for at least the last four quarters. The stock was down sharply Wednesday on a deteriorating economic perspective. When it reports earnings though, it may benefit as a result of its softness into what could be another good result versus the consensus EPS estimate. If that occurs, I suggest traders use the opportunity to sell the shares without hesitation into strength, as I expect a deteriorating economic perspective to weigh on the energy complex, especially the high-beta services firms like Schlumberger. In fact, I think selling it now would also work for investors, despite the stock's slide.
Schlumberger was down Wednesday alongside its peers in the energy complex, and its underperformance reflected its position in the cyclical Oil and Gas Equipment and Services Industry.
April 17, 2013
iPath S&P GSCI Crude Oil TR Index (OIL)
SPDR S&P Oil & Gas Equip. & Svcs. (XES)
Exxon Mobil (XOM)
However, SLB has a catalyst ahead of it that could provide some short-term lift. After all, the company has beaten EPS expectations regularly recently.
When a company has a history of beating estimates, investor expectations for it to continue are built into the stock price. However, when a stock is beaten down heading into good news, it might have a better chance of performing well on the news, based on my experience. It is hard to say whether SLB will outperform operating expectations, but there is some evidence that the quarter is manageable. Estimates have been adjusted downward through the quarter.
Consensus EPS Estimate
Current EPS Estimate
7 Days Ago
30 Days Ago
60 Days Ago
90 Days Ago
Why Sell SLB No Matter
The downward trend of estimates could portend an EPS report in line or even short of expectations if analysts have not kept up with economic realities. But if the company outperforms expectations as is usual for it, this trend line still hints at my reasoning to use any strength to sell on.
A deteriorating economic outlook, something I have been fighting the herd about for several weeks now, weighs heavily on the energy complex. The reader may skim through some of the articles I have authored over recent weeks for a background on my economic view. I have just listed a few here, and they can all be reviewed at my profile page at Seeking Alpha.
- The Real Unemployment Rate & its Economic Implications
- Debunking the Chinese Trade Data
- The Jobs Disaster May Seal the Recession Deal
- The Economic Message is Getting Harder to Ignore
- Recession Signal - Consumers Sound Off on Higher Payroll Taxes
- The Fed's Math Just Doesn't Add Up
If my expectation for economic shortfall plays out, then Schlumberger, with its 1.8 beta coefficient, stands in harm's way. A beta over 1.0 identifies cyclically sensitive shares. Oil and gas equipment and services companies do well when oil and gas prices are high, which is often the result of robust economic growth and energy demand. But with Europe still suffering in recession, China growth in question again and the U.S. economic outlook probably less sanguine than the market has priced in (and than the Federal Reserve has forecast), Schlumberger appears to have a difficult operating environment developing. I expect the broader market to correct on changing economic expectations, and the high-beta shares of SLB to exaggerate a market correction. Therefore, I would sell SLB here ahead of the EPS report and certainly on strength after any EPS pop.