NEW YORK (TheStreet) -- It's not often that shares of Schlumberger (SLB) , the world's largest oilfield-service company by both revenue and market capitalization, become cheap. But they are now, compared to where they have been, and compared to the average of companies in the S&P 500.
The stock is down 5.1% over the past six months, but Schlumberger's expanding margins, which recently boosted its third-quarter earnings by more than 13% year over year, could propel the stock toward $120, for a 25% gain. Still, investors will need to be patient.
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It's Schlumberger's ability to grow its margins that has the median price target of analysts at $120 in the next 12 to 18 months. And that's still $20 less than the highest analyst target of $140, according to CNN Money.
West Texas Intermediate light crude closed Wednesday at $78.68 per barrel, representing a one-month decline of 13% and a 12-month decline of 17%, according to CNN Money. This is more than 26% below its 52-week high of $107.03.
Weak oil prices and the fear that prices will remain depressed for an extended period of time have pressured the entire energy sector, not just Schlumberger. The Energy Select Sector ETF (XLE) , for instance, is down 10% over the past six months. But Schlumberger has been one of the hardest-hit companies, falling 19% since reaching a 52-week high of $118.76 on July 1.
While Schlumberger hasn't been alone in its punishment, very few companies within the sector offer the potential reward that Schlumberger does, should oil prices rebound. For the January quarter, Schlumberger is projected to grow full-year 2014 earnings per share to $5.62, representing an 18% year-over-year jump, according to CNN Money. And if fiscal 2016 estimates of $6.35 per share are reached, Schlumberger is on track to grow earnings by almost 34% in two years.
Part of the optimism has to do with the company's ability to shield itself from things it can't control, including U.S. and European economic sanctions against Russia over the Ukraine crisis. In August, Schlumberger said these issues would have limited impact on its operations. With both third-quarter revenue and profits growing and beating analysts' estimates, this was proven true. And the company sees no signs of slowing down.
Last month, while speaking to analysts CEO Paal Kibsgaard said, "The key to the overall oil market is still that the global oil demand is currently set to increase by 1.1 million barrels per day in 2015, which will require growth in exploration and production investments." And North America, which grew third-quarter revenue at 18.1% year over year, will be a main driver of that growth.
Kibsgaard and his team continue to make the sort of efficiency improvements to grow both margins and the company's market share. While speaking to analysts about his company's performance, he said, "Several factors contributed to this performance, including continued market penetration of new technologies that helped further drive our international margins as well as margin gains in North America from operational efficiency and market share improvements."
In other words, the growth Schlumberger sees in the next 12 to 18 months will come from the company's drilling and production technology -- an area where it's made significant capital investments. Some of these are already paying off, helping it achieve a third-quarter operating margin of 19.75%, which was up 20 basis points year over year.
And with third-quarter net profit margins of 15.51%, up 78 basis points from last year, Schlumberger's attention to efficiency will continue to boost its bottom line. What's more, the company had $7.2 billion in cash at the end of the third quarter -- leaving plenty of options for buybacks and dividend increases.
Schlumberger shares are trading at 18 times what the company earned per share over the past year, so it's not the cheapest stock in the sector, but it is well-positioned to deliver for the long term.
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 multiple strengths, 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, growth in earnings per share, good cash flow from operations and increase in net income. We feel these strengths outweigh the fact that the company shows low profit margins."
You can view the full analysis from the report here: SLB Ratings Report