Shares of Halliburton (HAL) have a lackluster YTD performance decline of 10.84%, primarily owed to the depressed oil price (see chart below). As the oil price started to rebound recently, the stock has picked up some gains. At $30.77 per share, the stock is trading at 4.8x the NTM EBITDA and 9.7x the NTM EPS. I believe there remains a solid upside for the stock going forward given that Halliburton is attractively priced relative to the peers in the oilfield services sector when considering its robust fundamentals.
My value analysis includes a set of three oilfield service peers listed in the U.S. with somewhat comparable firm sizes, as measured by market cap. The latter analysis is all based on the table shown below:
Consensus estimates from Capital IQ predict HAL's revenues, EBITDA, and EPS to rise by a 2-year CAGR of 10.2%, 7.8%, and 4.6%, respectively, over the current and next fiscal years. Accounting for the growth prospects, the stock is cheaply priced at just 0.4x PEG, which is even lower than the peer average of 0.6x.
The peer group's average growth potentials as measured by the 2-year CAGRs for revenues, EBITDA, and EPS appear to be superior to those of Halliburton. Nevertheless, Halliburton has an absolute profitability advantage. It only marginally underperforms in gross margin, but its EBITDA, EBIT, and net income margins, as well as ROE an ROIC are all substantially higher than the peer averages.
Halliburton also has a relatively solid FCF margin of 3.0%, while the group average is negative. Its in-line debt level along with the above-average EBIT margin has helped the firm sustain a strong interest coverage ratio. More critically, being a capital-intensive company, Halliburton has been able to maintain a very liquid balance sheet with the highest current and quick ratios among the group.
As such, the company's stock should reasonably warrant a valuation with a solid premium ranging from 10% to 15% when accounting for its large operation scale and superior profitability and liquidity but slower growth ahead. However, the current stock price of $30.77 only implies a 13.7% valuation discount to both the peer average EV/EBITDA and P/E multiples, suggesting that the market is not giving enough credit to the firm's financial excellence.
Bottom line, in light of the attractive valuations and healthy fundamentals, HAL is my top pick in the large-cap oilfield service group. I recommend acquiring the shares at the current price or establishing a long position by selling out-of-money put options.
Comparable value analysis table is created by author, price chart is sourced from Capital IQ, and all financial data is sourced from Morningstar and Capital IQ.
Disclosure: I am long HAL.