Will Schlumberger Tank in 2013?

With shares of Schlumberger Limited (NYSE:SLB) trading at around $73.05, is SLB an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Schlumberger is the largest oilfield service provider in the world, but this doesn’t guarantee strong future performance. Let’s take a look at some positives and negatives for Schlumberger.

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Positives:

  • Diversified in product and geographical senses
  • Consistent annual revenue growth
  • Consistent annual EPS growth
  • Strong cash flow
  • Impressive margins
  • Decent dividend yield of 1.70 percent (industry average of 1.40 percent)
  • Quality debt management
  • Trading at fair valuation
  • Expects double-digit earnings growth in 2013 (if industry trends are favorable)

Industry trends aren’t likely to be favorable, but that will be covered further in the Trends section. There are two other big negatives. One is that the stock was crushed in 2008, which indicates a lack of resiliency. The other is that Schlumberger expects North American drilling activity to weaken.

Now, let’s get to some numbers. The chart below compares fundamentals for Schlumberger, Halliburton Company (NYSE:HAL), and Baker Hughes Incorporated (NYSE:BHI). Schlumberger has a market cap of $96.98 billion, Halliburton has a market cap of $36.44 billion, and Baker Hughes has a market cap of $19.85 billion.

SLB

HAL

BHI

Trailing   P/E

17.82

13.76

15.13

Forward   P/E

12.72

9.98

10.70

Profit   Margin

13.03%

9.24%

6.14%

ROE

16.51%

17.84%

7.93%

Operating   Cash Flow

$6.69 Billion

$3.65 Billion

 $1.84 Billion

Dividend   Yield

1.70%

1.20%

1.30%

Short   Position

0.90%

1.90%

2.50%

 

It should be noted that Schlumberger is the only company of the three that has positive levered free cash flow, which isn’t shown on the chart above. Schlumberger has levered free cash flow of $2.19 billion, Halliburton has levered free cash flow of -$96.75 million, and Baker Hughes has levered free cash flow of -$836.88 million. Schlumberger also offers the highest yield. Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Schlumberger is stronger than the industry average of 0.40.

Debt-To-Equity

Cash

Long-Term Debt

SLB

0.33

$6.28 Billion

$11.63 Billion

HAL

0.31

$2.75 Billion

$4.82 Billion

BHI

0.28

$1.02 Billion

$4.92 Billion

 

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T = Technicals Have Weakened  

Schlumberger hasn’t performed well over the past month. Then again, neither have its peers.

1 Month

Year-To-Date

1 Year

3 Year

SLB

-8.02%

5.80%

10.41%

16.16%

HAL

-6.11%

13.75%

24.13%

28.31%

BHI

-6.30%

10.39%

11.64%

-2.03%

 

At $73.05, Schlumberger is trading below its 50-day SMA and 100-day SMA, and above its 200-day SMA.

50-Day   SMA

76.83

100-Day   SMA

74.66

200-Day   SMA

72.92

 

E = Earnings Have Been Steady               

Since 2010, revenue and earnings have consistently improved on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

27.58

22.98

28.16

37.09

42.32

Diluted   EPS ($)

4.45

2.59

3.38

3.67

4.10

 

Looking at the last quarter on a year-over-year basis, revenue improved and earnings declined.

12/2011

3/2012

6/2012

9/2012

12/2013

Revenue   ($)in   billions

9.74

10.66

10.49

10.65

10.52

Diluted   EPS ($)

1.04

0.97

1.05

1.07

1.01

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry Right Now

The commodity sell-off indicates weakening global demand. In this type of deflationary environment, oil has the potential to trade lower than $50/barrel by the end of the year. If it weren’t for several geopolitical events, then it would have the potential to trade even lower (still a possibility).

Despite a lot of excitement for alternative energy, oil will still be the big winner for many years to come. However, the next one to two years look bleak.

Natural gas has been on a tear, but this isn’t likely to last.

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Conclusion

Schlumberger is a strong company that is now stuck in a suddenly weak industry. This isn’t a safe place to be in the current economic environment.

Schlumberger is a STAY AWAY.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my personal analysis and views and should never be considered professional advice. You should do your own research and consult with a professional financial adviser before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.