The Best Energy Service Company: Schlumberger Or Halliburton?

Includes: BHGE, HAL, SLB, WFT
by: Insider Monkey

Schlumberger (NYSE:SLB) is an oil and gas equipment and services company, serving both exploration and production companies. The company recently traded at $75.96 a share. Analysts expect the stock will hit $101.73 within a year and are recommending a buy overall, but is it a good deal right now?

Numbers can lie, but they are an investor’s best friend when it comes to determining whether a stock is a buy. According to Joel Greenblatt, Gotham Capital fund manager, all anyone can do is “figure out what it’s worth and pay a lot less.” While not everyone is a pro when it comes to company valuation, there are a few metrics anyone can use to get an approximation of a stock’s real value: the current price multiples, the consistency of past earnings and cash flow, the amount of growth expected. Let’s see what these numbers can tell us about SLB.

Current Price Multiples

First, we will look at the P/E ratio. This metric divides a company’s share price by its earnings per share – the lower the number, the better. P/E ratio indicates how many times its earnings a company is trading at. If the P/E ratio is high, the stock could be overpriced.

Next, we will take a look at the company’s enterprise value to unlevered free cash flow. To get this metric, we will divide the company’s enterprise value (market cap plus debt minus cash) by its unlevered free cash flow (just free cash flow with interest payments added back in). The lower this number, the better. Like with the P/E ratio, if this number is too high it means the stock is likely overpriced.

There are two different camps of thought on this subject, each thinks the other multiple is more important, but they agree on one common aspect. The lower these multiples are the better.

SLB has a P/E ratio of 22.41 and an EV/FCF of 47.18. These numbers are much than a company like McDonalds (NYSE:MCD). MCD has a P/E ratio of 18.94 and an EV/FCF of 23.81, but SLB is in a very different industry. So, to get some perspective on these numbers, let’s look at SLB’s closest competitors – Halliburton Company (NYSE:HAL), Weatherford International (NYSE:WFT) and Baker Hughes (BHI).

HAL has a lower P/E ratio at 14.23 but a much higher EV/FCF at 96.29. WFT has a 70.83 P/E ratio of and an EV/FCF of 137.38, indicating the stock is overpriced relative to its earnings. BHI is the closest to SLB. It has a P/E ratio of 19.90 and an EV/FCF of 69.84.

Earnings Consistency

An ideal investment has strong consistency in its earnings. It would have a small range for its free cash flow yield. SLB’s cash flow yield over the last five years ranges from 1.49% to 6.27%, for an average of 3.37%. HAL has a much broader range, free cash flow yield from 0.20% to 9.84% over the last five years. It is currently averaging 3.56%. BHI’s free cash flow yield ranges from -3.33% to 3.15%, for an average of 0.01% WFT has the broadest range and is the only stock we looked at that trends negative. Its average over the last five years is -2.58%, with a range of -17.56% to 1.44%.

Expected Growth

Expected growth estimates can be wrong. In fact, they are frequently overstated, but they can be useful when comparing companies or comparing a company’s performance relative to its industry. For instance, in the case of SLB, over the last five years, it has grown 9.1%, several times higher compared to its industry, which grew 1.9%. Going forward, SLB is expected to grow 13.0%, which is less than estimates for its industry, which place growth at 25.6%. HAL had less growth than SLB over the last five years (6.9% vs. SLB’s 9.1%) but analysts expect HAL will advance more than SLB over the next five years. They forecast HAL will grow at 18.0% compared to SLB’s forecasted 13.0%. WFT on the other hand lost -7.2% in the last five years, but it is expected to almost meet the industry over the next 5 years. Analysts predict it will grow at 16.0% compared to the industry’s forecasted 17.8%. BHI is forecasted to grow the most. Analysts predict the stock will grow 23.0% over the next five years.

The Bottom Line

We’ve looked at SLBs and its closest competitors’ price multiples, operational performance and growth. SLB is not a bad pick, but we like HAL best. Looking at its expected growth, HAL’s estimated growth is much higher. HAL also had the lowest price to earnings ratio we looked at. Ken Fisher’s Fisher Asset Management seems to agree. The fund opened a new $284 million position in HAL during the second quarter this year. Ken Heebner’s Capital Growth Management and Ken Griffin’s Citadel Investment Group are also fans of HAL.

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