Schlumberger - SLB Beats Earnings and Is Still Undervalued

Introduction to my SLB Analysis Schlumberger is undervalued and a solid investment. I'm going to jump into why I believe this to be the case. We are going to look at SLB's current valuation, recent earnings, and 7 key financial ratios. This is a fairly long analysis but if you're thinking of investing in SLB then you should have a decent understanding of why you decided to make this investment. Anyway, enough with the intro, let's jump into the analysis. SLB Stock Overview  If you're not familiar with SLB then here is a quick summary, feel free to jump past this part. “Schlumberger Limited provides technology for the energy industry worldwide. The company operates through four divisions: Digital & Integration, Reservoir Performance, Well Construction, and Production Systems. It offers software, information management, and IT infrastructure services; consulting services for reservoir characterization, field development planning, and production enhancement; petro technical data services and training solutions; reservoir interpretation and data processing services; asset performance solutions; open and cased-hole services; exploration and production pressure and flow-rate measurement services; pressure pumping, well stimulation, and coiled tubing equipment for downhole mechanical well intervention, reservoir monitoring, and downhole data acquisition; and integrated production systems. The company also provides mud logging and engineering support services; drilling equipment and services for shipyards, drilling contractors, energy companies, and rental tool companies; land drilling rigs and related services; drilling tools; well cementing products and services; and well planning and drilling, engineering, supervision, logistics, procurement, contracting, and drilling rig management services, as well as supplies engineered drilling fluid systems; and designs, manufactures, and markets roller cone and fixed cutter drill bits. In addition, it offers well completion services and equipment; artificial lift production equipment and optimization services; valves; process systems; and integrated subsea production systems comprising wellheads, subsea trees, manifolds and flowline connectors, control systems, connectors, and services, as well as designs and manufactures onshore and offshore platform wellhead systems and processing solutions. The company was formerly known as Socie´te´ de Prospection E´lectrique. Schlumberger Limited was founded in 1926 and is based in Houston, Texas.” SLB Valuation and Stock Rating Understanding the valuation of a stock is a useful check to see if the investment fundamentals are sound. I pulled the valuation and stock rating for a quick view to see if SLB is considered undervalued or overvalued. Analysts of SLB have given an overall rating of 5, on a rating scale between 1 and 5, with 1 being the worst and 5 being the best. This overall rating consists of 3 different ratings, PE, ROE and DCF which I'll get into below. PE Rating: Currently, analysts have given SLB a PE rating of 5. This is the highest ranking and implies that the SLB stock is currently undervalued. The PE rating factors in the trailing, current, and future PE Ratio of the SLB stock. In the case of SLB, analysts think that SLB is undervalued given their P/E ratios, relative to the average P/E ratio of their peers. ROE Rating: Currently, SLB has been given an ROE rating of 3 by analysts. This is the highest score one can achieve via an ROE rating. This indicates that SLB's ROE is not only healthy, but better than their peers. SLB's ROE score of 3 implies that they are currently profitable and are generating these profits in an efficient manner. A high rating such as SLB's could also indicate that their management team is better at managing inventory, cash flows, and business operations better than the management teams of SLB's peers. DCF Rating: We have saved the best (and most influential) rating for last. SLB has been given a score of 5 based on the quality of their DCF model (and projections). The DCF model is very commonly used by investors to value securities and is the de facto measurement of a stocks value. As a result of this, a high level of importance is placed on the company's DCF models. With that being said, SLB's score of 5 is very good, implying the outlook for SLB is very positive, and their stock is currently undervalued. Based on these metrics we can see that SLB seems to be undervalued and a solid investment. Considering these core metrics look good, I would be likely to take a position in SLB. That being said, I want to look at some other metrics and factors. SLB Stock Key Ratio Analysis There are 7 main financial ratios that we are going to look at today. These ratios can help us to get a general idea of the financial health of the SLB stock before we choose to enter into (or add to) a position. These ratios can help us to understand the current state of Schlumberger Limited's business, as well as what their future might look like. SLB EPS: EPS is one of (if not) the most commonly used in finance. SLB's EPS is currently 0.34, which means that for every outstanding share of SLB they make$0.34 in net income (after tax). EPS figures can be manipulated by the company, as there are accounting practices that can be used to hide unfavourable expenses/figures, so don't look at this figure as the “be all end all” SLB P/E Ratio: The P/E ratio is another very popular financial ratio that is used very commonly. This ratio is used in conjunction with EPS, as the P/E ratio is simply the price of the stock divided by its EPS. As a general rule of thumb (explained by Peter Lynch in his book “one up on wall street”), a company's P/E ratio should be roughly equal (or higher) to their growth rate. In the case of SLB, they have a P/E ratio of 31.83, while their EPS growth rate (3Y) is 22.53%. Since their P/E ratio is somewhat close to their EPS growth rate, SLB seems to be an alright (somewhat attractive) investment prospect. SLB ROE: A company's ROE is the return a company can receive by projects/investments funded by their shareholder's equity (how well they can turn money into more money). A high ROE is typically favourable, unless it is unusually high, then you may have to do some further investigation. ROE's over 15% are considered to be good, and SLB's ROE is currently at 0.13. This is very high, which can lead to higher returns, however, there is also more risk in an investment into SLB. SLB Debt-to-Equity: A company's Debt-to-Equity ratio shows us how much debt a company is carrying relative to the amount of shareholder's equity they have. By taking a quick look at this figure we can determine if a company's debt levels are potentially risky and need further investigation into. If a company's D/E ratio is above 2.5, we may want to analyze their debt to determine if they will be able to pay it all back (avoiding defaults). SLB's current D/E ratio is 2.05, and thus we will have to analyze their debt in more detail. SLB Interest Coverage Ratio: This figure is often used in conjunction with the D/E ratio in order to determine if a company can handle their current level of debt. This metric shows us how well a company's earnings can be used to cover their debt obligations. A high Interest Coverage Ratio indicates that a company should have no problem paying off their debts, and a low coverage ratio may indicate future debt/insolvency problems. SLB currently has an interest coverage ratio of 4.46, which means that their earnings cover their interest payments 4.46 times over. This indicates that SLB should have no problem meeting their debt obligations. SLB EV/EBIT: The EV/EBIT ratio is like the P/E ratio in the sense that they are measures of the value that you are receiving for purchasing a stock at its current market price. Using the EV/EBIT ratio (rather than the P/E ratio) is beneficial as it factors in the company's debt. A lower EV/EBIT ratio indicates that the stock is close to its fair value, and potentially has more intrinsic value than other stocks. Currently, SLB has an EV/EBIT ratio of 13.81, meaning that it will take 13.81 years in order for SLB to generate enough income to reach their current enterprise value. This is high in general terms, however when looking at average Energy EV/EBIT ratios this is quite normal and indicates SLB is close to their fair value. Operating Margin: A company's operating margin measures the profitability of the company's operations. This metric is most important when using it to compare to peers of a company. This is due to the fact that different industries have a different level of profitability. However, if your company's operations are more profitable than your peers, you have an advantage and are a more attractive option. Currently, SLB's operating margin is 0.11, in comparison to the Oil & Gas Equipment & Services industry's average operating margin of 16.03%. Why I Think SLB is Undervalued Overall, I think that the SLB stock is undervalued. This is due to SLB overall stock grade being ranked a 5, track record of beating earnings. Looking at the macro view of oil and gas still being a key aspect of the global economy, and SLB being the leader in the oil and gas service space, I think we will continue to see Schlumberger move in a positive direction. Thanks for taking the time to read my analysis, please follow me for the latest investment insights and leave a comment if you have any questions or disagree with my thoughts - always open to a good discussion!

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Schlumberger - SLB Beats Earnings and Is Still Undervalued

bullish

Introduction to my SLB Analysis

Schlumberger is undervalued and a solid investment. I'm going to jump into why I believe this to be the case. We are going to look at SLB's current valuation, recent earnings, and 7 key financial ratios. This is a fairly long analysis but if you're thinking of investing in SLB then you should have a decent understanding of why you decided to make this investment. Anyway, enough with the intro, let's jump into the analysis.

SLB Stock Overview

If you're not familiar with SLB then here is a quick summary, feel free to jump past this part.

“Schlumberger Limited provides technology for the energy industry worldwide. The company operates through four divisions: Digital & Integration, Reservoir Performance, Well Construction, and Production Systems. It offers software, information management, and IT infrastructure services; consulting services for reservoir characterization, field development planning, and production enhancement; petro technical data services and training solutions; reservoir interpretation and data processing services; asset performance solutions; open and cased-hole services; exploration and production pressure and flow-rate measurement services; pressure pumping, well stimulation, and coiled tubing equipment for downhole mechanical well intervention, reservoir monitoring, and downhole data acquisition; and integrated production systems. The company also provides mud logging and engineering support services; drilling equipment and services for shipyards, drilling contractors, energy companies, and rental tool companies; land drilling rigs and related services; drilling tools; well cementing products and services; and well planning and drilling, engineering, supervision, logistics, procurement, contracting, and drilling rig management services, as well as supplies engineered drilling fluid systems; and designs, manufactures, and markets roller cone and fixed cutter drill bits. In addition, it offers well completion services and equipment; artificial lift production equipment and optimization services; valves; process systems; and integrated subsea production systems comprising wellheads, subsea trees, manifolds and flowline connectors, control systems, connectors, and services, as well as designs and manufactures onshore and offshore platform wellhead systems and processing solutions. The company was formerly known as Socie´te´ de Prospection E´lectrique. Schlumberger Limited was founded in 1926 and is based in Houston, Texas.”

SLB Valuation and Stock Rating

Understanding the valuation of a stock is a useful check to see if the investment fundamentals are sound. I pulled the valuation and stock rating for a quick view to see if SLB is considered undervalued or overvalued. Analysts of SLB have given an overall rating of 5, on a rating scale between 1 and 5, with 1 being the worst and 5 being the best. This overall rating consists of 3 different ratings, PE, ROE and DCF which I'll get into below.

PE Rating: Currently, analysts have given SLB a PE rating of 5. This is the highest ranking and implies that the SLB stock is currently undervalued. The PE rating factors in the trailing, current, and future PE Ratio of the SLB stock. In the case of SLB, analysts think that SLB is undervalued given their P/E ratios, relative to the average P/E ratio of their peers.

ROE Rating: Currently, SLB has been given an ROE rating of 3 by analysts. This is the highest score one can achieve via an ROE rating. This indicates that SLB's ROE is not only healthy, but better than their peers. SLB's ROE score of 3 implies that they are currently profitable and are generating these profits in an efficient manner. A high rating such as SLB's could also indicate that their management team is better at managing inventory, cash flows, and business operations better than the management teams of SLB's peers.

DCF Rating: We have saved the best (and most influential) rating for last. SLB has been given a score of 5 based on the quality of their DCF model (and projections). The DCF model is very commonly used by investors to value securities and is the de facto measurement of a stocks value. As a result of this, a high level of importance is placed on the company's DCF models. With that being said, SLB's score of 5 is very good, implying the outlook for SLB is very positive, and their stock is currently undervalued.

Based on these metrics we can see that SLB seems to be undervalued and a solid investment. Considering these core metrics look good, I would be likely to take a position in SLB. That being said, I want to look at some other metrics and factors.

SLB Stock Key Ratio Analysis

There are 7 main financial ratios that we are going to look at today. These ratios can help us to get a general idea of the financial health of the SLB stock before we choose to enter into (or add to) a position. These ratios can help us to understand the current state of Schlumberger Limited's business, as well as what their future might look like.

  • SLB EPS: EPS is one of (if not) the most commonly used in finance. SLB's EPS is currently 0.34, which means that for every outstanding share of SLB they make$0.34 in net income (after tax). EPS figures can be manipulated by the company, as there are accounting practices that can be used to hide unfavourable expenses/figures, so don't look at this figure as the “be all end all”

  • SLB P/E Ratio: The P/E ratio is another very popular financial ratio that is used very commonly. This ratio is used in conjunction with EPS, as the P/E ratio is simply the price of the stock divided by its EPS. As a general rule of thumb (explained by Peter Lynch in his book “one up on wall street”), a company's P/E ratio should be roughly equal (or higher) to their growth rate. In the case of SLB, they have a P/E ratio of 31.83, while their EPS growth rate (3Y) is 22.53%. Since their P/E ratio is somewhat close to their EPS growth rate, SLB seems to be an alright (somewhat attractive) investment prospect.

  • SLB ROE: A company's ROE is the return a company can receive by projects/investments funded by their shareholder's equity (how well they can turn money into more money). A high ROE is typically favourable, unless it is unusually high, then you may have to do some further investigation. ROE's over 15% are considered to be good, and SLB's ROE is currently at 0.13. This is very high, which can lead to higher returns, however, there is also more risk in an investment into SLB.

  • SLB Debt-to-Equity: A company's Debt-to-Equity ratio shows us how much debt a company is carrying relative to the amount of shareholder's equity they have. By taking a quick look at this figure we can determine if a company's debt levels are potentially risky and need further investigation into. If a company's D/E ratio is above 2.5, we may want to analyze their debt to determine if they will be able to pay it all back (avoiding defaults). SLB's current D/E ratio is 2.05, and thus we will have to analyze their debt in more detail.

  • SLB Interest Coverage Ratio: This figure is often used in conjunction with the D/E ratio in order to determine if a company can handle their current level of debt. This metric shows us how well a company's earnings can be used to cover their debt obligations. A high Interest Coverage Ratio indicates that a company should have no problem paying off their debts, and a low coverage ratio may indicate future debt/insolvency problems. SLB currently has an interest coverage ratio of 4.46, which means that their earnings cover their interest payments 4.46 times over. This indicates that SLB should have no problem meeting their debt obligations.

  • SLB EV/EBIT: The EV/EBIT ratio is like the P/E ratio in the sense that they are measures of the value that you are receiving for purchasing a stock at its current market price. Using the EV/EBIT ratio (rather than the P/E ratio) is beneficial as it factors in the company's debt. A lower EV/EBIT ratio indicates that the stock is close to its fair value, and potentially has more intrinsic value than other stocks. Currently, SLB has an EV/EBIT ratio of 13.81, meaning that it will take 13.81 years in order for SLB to generate enough income to reach their current enterprise value. This is high in general terms, however when looking at average Energy EV/EBIT ratios this is quite normal and indicates SLB is close to their fair value.

  • Operating Margin: A company's operating margin measures the profitability of the company's operations. This metric is most important when using it to compare to peers of a company. This is due to the fact that different industries have a different level of profitability. However, if your company's operations are more profitable than your peers, you have an advantage and are a more attractive option. Currently, SLB's operating margin is 0.11, in comparison to the Oil & Gas Equipment & Services industry's average operating margin of 16.03%.

Why I Think SLB is Undervalued

Overall, I think that the SLB stock is undervalued. This is due to SLB overall stock grade being ranked a 5, track record of beating earnings. Looking at the macro view of oil and gas still being a key aspect of the global economy, and SLB being the leader in the oil and gas service space, I think we will continue to see Schlumberger move in a positive direction.

Thanks for taking the time to read my analysis, please follow me for the latest investment insights and leave a comment if you have any questions or disagree with my thoughts - always open to a good discussion!

read-time
7 min
49.90
Target Price
9/ 10
Confidence
2-6 Months
Timeframe
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Earnings Release
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