ModernGraham Quarterly Valuation Of Halliburton

| About: Halliburton Company (HAL)
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Summary

HAL is suitable for the both the Defensive Investor and the Enterprising Investor following the ModernGraham approach.

According to the ModernGraham valuation model, the company is undervalued at the present time.

The market is implying 2.35% earnings growth over the next 7-10 years, which is significantly less than the rate the company has seen in recent years.

Halliburton Company (NYSE:HAL) presents an intriguing investment possibility for value investors as the company has maintained strong earnings growth over the last few years that may not be properly priced into the market price. Benjamin Graham, the father of value investing, taught that looking at the price cannot be the sole factor in investment decisions as the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how Halliburton fares in the ModernGraham valuation model.

The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries.

HAL Chart

HAL data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - FAIL
  6. Moderate PEmg (price over normalized earnings) ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $40.51
MG Value $66.16
MG Opinion Undervalued
Value Based on 3% Growth $44.50
Value Based on 0% Growth $26.08
Market Implied Growth Rate 2.35%
Net Current Asset Value (NCAV) -$1.46
PEmg 13.20
Current Ratio 2.52
PB Ratio 2.23

Balance Sheet - September 2014

Current Assets $14,847,000,000
Current Liabilities $5,889,000,000
Total Debt $7,816,000,000
Total Assets $31,583,000,000
Intangible Assets $2,312,000,000
Total Liabilities $16,092,000,000
Outstanding Shares 854,000,000

Earnings Per Share

2014 (estimate) $3.98
2013 $2.36
2012 $2.84
2011 $3.08
2010 $2.01
2009 $1.27
2008 $2.45
2007 $3.68
2006 $2.23
2005 $2.27
2004 -$1.12

Earnings Per Share - ModernGraham

2014 (estimate) $3.07
2013 $2.51
2012 $2.50
2011 $2.39
2010 $2.14
2009 $2.26

Dividend History

HAL Dividend Chart

HAL Dividend data by YCharts

Conclusion:

Halliburton passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor's only concern is the low level of earnings growth over the last ten years, while the Enterprising Investor has no initial concerns. As a result, value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.

When it comes to that valuation, it is critical to consider the company's earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $2.14 in 2010 to an estimated $3.07 for 2014. This is a fairly strong level of demonstrated growth which is well above the market's implied estimate for earnings growth of only 2.35% over the next 7-10 years. In fact, the historical growth is around 8.71% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.