Halliburton Is Undervalued By 3 Key Metrics

Jan.18.12 | About: Halliburton Company (HAL)

With Halliburton (NYSE:HAL) trading at the bottom of its 52-week range, I decided to take a closer look into the company to see if it is an attractive opportunity. Here are six points I looked at while researching HAL:

Valuation: HAL's trailing 5-year valuation metrics suggest that the stock is undervalued, as all of the metrics are below their 5 year averages. HAL's current P/B ratio is 2.5, and it has averaged 3.6 over the past 5 years with a high of 1.7 and low of 6.1. HAL's current P/S ratio is 1.4, and it has averaged 1.8 over the past 5 years with a high of 2.8 and low of 0.8. HAL's P/E ratio is 12.3, and it has averaged 15.3 over the past 5 years with a high of 27.9 and low of 6.9. On a discounted cash flow basis using a 10% cost of equity, I value shares at approximately $45 apiece. This means substantial upside could be in store.

Price Target: The consensus price target for the analysts who follow HAL is $52.50. That is upside of 54%, and suggests that the stock is significantly undervalued and has a lot of room to run from these levels.

Forward Valuation: Halliburton is trading at $34 a share, and analysts expect the company to report earnings of $4.13 next year for a forward P/E of 8. HAL's revenues are projected to grow 16%. Taking a look at what competitors trade at will provide a better idea of HAL's relative value. Baker Hughes (NYSE:BHI) is currently trading at $48 a share for a forward P/E of 9, with revenues projected to grow 15%. National Oilwell Varco (NYSE:NOV) is trading at $73 a share and has a forward P/E of 12, with revenues projected to grow 21%. Schlumberger (NYSE:SLB) is trading at $68 a share and has a forward P/E of 14, with revenues projected to grow 16%. The mean of the 3 stocks is a P/E of about 12, so HAL is undervalued about 50% relative to other publicly traded comps.

Earnings Estimates: HAL has beat EPS estimates its last 4 quarters by margins ranging from 2 to 7 cents. It seems like analysts have a pretty good idea of where HAL's earnings will be, so upside from earnings beats will be limited.

Dividend: HAL pays a dividend, and has paid one since 1982. It currently pays 9 cents a quarter for an annual yield of 1.1%. The quarterly dividend last increased in 2007 from 7.5 cents to 9 cents a share.

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Price Action: HAL was strong for the first 6 months of last year, rising nearly 50% to over $56 a share. The stock ran into some trouble over the summer, and the stock fell all the way to below $28 a share in October. Since then, the stock staged a rally to $40 a share before pulling back to its current price level of $34 a share. The stock is way below its 200 day moving average of $42 and just below its 50 day moving average of $35. On the upside, the $38 level should serve as a key resistance level, followed by $40. On the downside, $32 and $30 should serve as support.

Conclusion: HAL is undervalued here on all three valuation metrics, and looks like it deserves a spot in a portfolio. The stock should be able to recover to the levels that it traded at in the first half of last year. You will also receive a dividend while you sit and wait for the stock to recover. The industry should start to recover as the economy continues on the right path and demand for oil and oil equipment starts to increase.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.