Is Schlumberger Poised to Skyrocket?

With shares of Schlumberger Limited (NYSE:SLB) trading at around $73.30, 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 has been performing well internationally for a while now, but the United States has remained a drag. Is that about to change?

With more oil companies becoming more daring and willing to strive for difficult-to-drill wells, Schlumberger appears to be in the right place in the right time. Its services are likely to be in high demand. Another big benefit is that oil and gas companies want to work with established names, and no Oil & Gas Equipment & Services company is more established than Schlumberger. Those in the industry are also well aware of Schlumberger’s advanced technologies, which allow for more information and problem-solving abilities at drilling sites.

Another positive for Schlumberger is that it has been highly efficient as of late, taking advantage of the most profitable opportunities. There have been consistent annual improvements in gross margin and earnings (as well as revenue). Furthermore, Schlumberger is good at service upsells. Other positives include product diversification, geographic diversification, and a strong balance sheet.

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As if those aren’t enough positives, according to Glassdoor.com, employees have rated their employer a 3.6 of 5, which is above average. And a somewhat impressive 73 percent of employees would recommend the company to a friend. However, the most important stat is that 89 percent of employees approve of CEO Paal Kibsgaard. Strong leaders often lead to strong stock performance.

On the negative side, the industry has consistently increased its spending over the past few years, and Schlumberger expects to increase international spending by 10 percent this year. Of course, this can also be looked at as a positive over the long haul. It depends how industry trends play out. Another negative is pricing weakness.

As far as fundamentals go, Schlumberger is impressive compared to peers. It currently yields 1.70 percent whereas Baker Hughes Incorporated (NYSE:BHI) yields 1.30 percent and Halliburton Company (NYSE:HAL) yields 1.20 percent. As seen in the chart below, Schlumberger has the highest profit margin of the three companies mentioned here at 12.70 percent. It has the highest ROE at 15.96 percent. And it’s trading at 18 times earnings, which is in-line with peers. It should also be noted that Schlumberger has the smallest short position of the three at only 1.0 percent. This indicates that the shorts want to have nothing to do with Schlumberger, which is a positive sign. As far as analysts go, they love the stock: 30 Buy, 4 Hold, 0 Sell.

The chart below takes a look at some basic fundamentals for Schlumberger, Baker Hughes, and Halliburton.

SLB BHI HAL
Trailing P/E 17.97 16.86 19.73
Forward P/E 12.91 11.22 10.52
Profit Margin 12.70% 5.65% 6.96%
ROE 15.96% 7.13% 13.09%
Operating Cash Flow 7.07B 2.30B 3.27B
Dividend Yield 1.70% 1.30% 1.20%
Short Position 1.00% 2.50% 2.10%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Have Weakened

Schlumberger has performed well over the past year, but the past month has been weak. What does the future hold if the broader market maintains its upside momentum?

1 Month Year-To-Date 1 Year 3 Year
SLB -2.77% 6.65% 20.11% 37.75%
BHI -2.04% 12.46% 12.59% 22.87%
HAL -0.18% 22.81% 47.10% 89.00%

At $73.30, Schlumberger is trading below its averages.

50-Day SMA 74.55
200-Day SMA 74.62
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E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Schlumberger is stronger than the industry average of 0.40. Debt isn’t a concern.

Debt-To-Equity Cash Long-Term Debt
SLB 0.31 5.56B 11.10B
BHI 0.29 1.10B 5.09B
HAL 0.31 2.32B 4.82B

E = Earnings Have Been Steady

Earnings and revenue have consistently improved over the past three years.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 27,565 22,975 28,931 39,669 42,321
Diluted EPS ($) 4.45 2.59 3.38 3.67 4.10

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

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 10,611 10,448 10,608 11,174 10,668
Diluted EPS ($) 0.97 1.05 1.07 1.02 0.94

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?

Conclusion

Schlumberger is best of breed in its industry, but the industry’s potential might not be as strong as advertised. There is a theory that decreasing energy prices will lead to increased demand, but that’s like saying someone flushed the toilet and then went to the bathroom. The truth is that global demand is on shaky ground, and if it falters, it will lead to a chain reaction that won’t benefit Schlumberger. In a somewhat related matter of importance, Schlumberger’s stock was hit hard during the financial crisis. The fact that it was deemed the financial crisis isn’t important in this case. What’s important is that it was a deflationary environment and Schlumberger couldn’t maintain its strength in that environment. If the Federal Reserve removed all monetary stimulus, would a deflationary environment present itself once again? Nobody knows for sure, but it’s a possibility. In the meantime, potential rewards outweigh downside risks for Schlumberger. Therefore, Schlumberger is an OUTPERFORM.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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