Schlumberger Looks Good Long Term, But Ensco Looks Better

Includes: ESV, SII, SLB
by: Marc Courtenay

While I agree that the acquisition of Smith International (SII) is a good long-term move, Schlumberger (NYSE:SLB) has put itself in the "hole" (a.k.a. "two steps backward") for the time being.

Frankly, it was an expensive acquisition and dilutive to the share price. When I look at its balance sheet and the ratios-of-value that are important to me, I'd rather own more of Ensco International (NYSE:ESV) than SLB. In my portfolio I own more than twice the dollar amount of ESV than SLB, and for good reasons.

The share price of ESV currently sells for less than 7 times current earnings, and at a conservative 10 times future earnings. They've moved their headquarters to the U.K. for what I understand to be tax advantages and incentives, which should help their bottom line.

From a technical standpoint it appears we are at a critical area where an uptrend may develop. Look at the chart below and see for yourself.
Chart for Ensco International plc (<a href='' title='Ensco PLC'>ESV</a>)
Having broken below its 200-day moving average, it has recently broken back above it and the 50-day M.A. The MACD appears to be close to signaling a move upward, and the only other signal I'd like to see improve before buying would be an increase in volume as ESV moves higher.

The Relative Strength Indicator is also moving higher, but the current price-per-share is on the high side of the Bollinger Bands range. That could be bullish if it breaks above the current upside band.

If you look at the SLB technicals you'll notice why I'm not happy from a technical perspective with the share activity and the indicators.

Back to ESV, I surely like the valuation metrics, the balance sheet and the cash flow statement. Selling at almost 1X book value, and its Price-to-earnings-growth (PEG) ratio (5-year expected) is at 0.76. A PEG below one usually indicates excellent valuation. With profit margins at 41% (ttm) and operating margins at 52% we can understand even more about the price potential with this company.

Total cash (mrq) is over $1 billion, and the company is sitting on total-cash-per-share of over $7.13 (mrq). Its Operating Cash Flow (ttm) is $1.32 billion, levered free cash flow of $267 million and total debt (mrq) is a very reasonable $283 million.

Before I'd buy shares of this company I'd familiarize myself with its business strategy and fully acquaint myself with what it says on its web site about itself.

Will you and I be able to buy more shares at lower prices 6 months from now? It is very possible, and that is why I encourage potential investors to really get to know how a company trades, the fundamentals of the company and the technical perspective as well.

Look for trends, look for a consensus of indicators, look for several reasons to conclude that the stock price is oversold and "cheap." Whether you want to buy SLB or ESV, be patient and decrease your risk by waiting for the markets to have their next big correction before you buy. A sobering reminder of how far stocks like SLB and ESV can fall---SLB has a 52-week low of around $35 and ESV at around $22. I'm not saying they will fall that low again, but it wouldn't surprise me to see their share price much lower by this September. Caveat Emptor!

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Disclosure: I'm currently long ESV and to a lesser extent SLB