One of most undervalued stocks in my portfolio is Halliburton (HAL), which I picked up earlier this year. The stock is down some 40% since its highs over the summer. The entire oil services sector has been impacted by low natural gas prices and worries on what that means for production in that sector. I think those fears are overblown and believe that Halliburton's latest earnings report should help put those concerns to rest. The stock is poised for a nice run-up as it is way below intrinsic value, in my opinion.
Highlights from the company's earnings report include the following:
- North American revenue was up almost 40% year over year.
- Net income rose 23% year over year and revenue was up 30%. Both numbers beat expectations.
- The company took a $300 million charge related to the 2010 gulf oil spill, which should put that incident behind it.
- It expects margins to go down 200 to 250 basis points in North America in Q2, due to transition driven by low natural gas prices. This seems like a lower impact than investors were expecting.
As stated in the business description for Halliburton on Yahoo Finance:
Halliburton provides various products and services to the energy industry for exploring, developing, and producing oil and natural gas worldwide. It operates in two segments, Completion and Production, and Drilling and Evaluation.
Here are four additional reasons Halliburton is deeply undervalued at just $33 a share:
- North American revenue is at record highs. Given the huge new finds in oil and gas shale in this region, this trend should last years and power the stock forward as it is a major tailwind.
- Analysts consistently understate Halliburton's earnings power. It has now beat earnings estimates for 13 straight quarters.
- The company has a forward P/E of less than 8, which is an over 45% discount to its historical average. It has a minuscule five-year projected PEG (0.35).
- The median analysts' price target on Halliburton is $47, an approximate 40% discount to its current price. I also think that earnings estimates for FY2012 and FY2013, which have been coming down steadily for three months, should stabilize or even tick up based on this earnings report. This should be a major catalyst for stock appreciation in the coming months as this overhang gets removed.
Disclosure: I am long HAL.
