NEW YORK (TheStreet) – With shares of oil services giant Schlumberger (SLB) trading at around $109, it's become time to revisit an earlier prediction when I told you the stock was heading to $100. At the time, shares traded around $91.
Schlumberger stock is now up more than 22% on the year to date, doubling the energy sector's 11% gain. Since my buy recommendation in November, Schlumberger has rewarded shareholders with as much as 30% gains, reaching $118.76 on July 1. And there's more gains ahead.
Analysts have finally gotten on board. Of the 28 brokers who cover the company, Schlumberger has a high price target of $168 and a median target of $131, representing gains of 58% and 20%, respectively. There are currently no "sell" recommendations on the stock.
This is because Schlumberger, which competes with Halliburton (HAL) and Baker Hughes (BHI) , is the leader of the bunch by far. That said, it's time for investors to consider the entire energy sector -- a topic I've raised on more than one occasion.
To that end, it's a little surprising that Baker Hughes is trading at a higher earnings multiple than Schlumberger (P/E of 26 vs. P/E 20). For that matter, so is Halliburton, which trades at a P/E of 22. These threes companies often trade in tandem. But in this case, Schlumberger is being discounted since it outperforms both Halliburton and Baker Hughes in gross margin and operating margins.
In the case of Schlumberger, which is always looking to increase oilfield productivity in North America, the company is rapidly growing share in international markets. This is one way management has begun to differentiate itself from Halliburton and Baker Hughes.
The way I see it, Schlumberger should command a fair market value of $130 to $135 in the next 12 to 18 months. Consider that management continues to invest in research and development to uncover new drilling processes -- whether unconventional or otherwise.
The main drivers of Schlumberger's growth will come from the company's drilling and production technology, which is where a meaningful portion of the company's capital investments have gone. Management has raised expectations about the company's integration capabilities and what management calls "best-in-class operations and technology."
So If the company can crack the efficiency code of the fracking industry, the company would kick down doors and paving the way for new streams of revenue for years to come. It's not going to happen overnight, however. For now, management has to address geopolitical unrest and its impact on pricing in international oil and gas markets.
To offset pricing pressure due to (among other things) weak oil prices, cost inflation and slumping production levels, Schlumberger will have to use its strong free cash flow to make the sort of efficiency improvements needed to grow its bottom line. It's not a major challenge.
The company is already generating gross margin of 23.1%. In the most recent quarter, gross margin was up one point year over year -- reflecting how effective these operational improvements have been. This means that Schlumberger is in great hands. Investors have to trust that management will use capital intelligently to produce long-term returns.
All told, investors should expect continue revenue and cash-flow growth over the next couple of years. By 2017, management is targeting earnings between $9 and $10 per share, which would result in a compound annual growth rate of roughly 17% to 20%. So with the stock trading at around $109, Schlumberger remains one of the best bargains in the energy sector.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates SCHLUMBERGER LTD as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate SCHLUMBERGER LTD (SLB) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, solid stock price performance and good cash flow from operations. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- SLB's revenue growth trails the industry average of 20.7%. Since the same quarter one year prior, revenues slightly increased by 7.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- The current debt-to-equity ratio, 0.33, is low and is below the industry average, implying that there has been successful management of debt levels. To add to this, SLB has a quick ratio of 1.55, which demonstrates the ability of the company to cover short-term liquidity needs.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Energy Equipment & Services industry and the overall market on the basis of return on equity, SCHLUMBERGER LTD has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
- Compared to its closing price of one year ago, SLB's share price has jumped by 28.90%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- SCHLUMBERGER LTD's earnings per share declined by 17.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, SCHLUMBERGER LTD increased its bottom line by earning $5.11 versus $3.91 in the prior year. This year, the market expects an improvement in earnings ($5.70 versus $5.11).
- You can view the full analysis from the report here: SLB Ratings Report