Buy this Undervalued Growth Stock
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Time and again it’s been proven that diversified businesses can stand the test of time, better than their non diversified peers. Also when the business is based in a growing industry, the investment opportunity looks all the more attractive.
Halliburton Company (NYSE: HAL) is the second largest oilfield service provider in the world which not only offers equipment and maintenance services, but also engineering and construction services. The company with a market cap of $34.73 billion has its reach in 80 countries which include countries from North America, Middle East, Latin America, and Europe.
Crude had fallen to below $40 levels during the period of housing crisis, and now that things are better, the commodity has surged to the $110 mark. It’s but obvious that oil companies will benefit with the increased levels of crude extraction, but to increase the production, companies need to expand their facilities. The expansion of their existing facilities as well as venturing into new areas requires oil field service providers for the equipment and maintenance, and that is exactly where Halliburton Company makes its entry.
Novel Invention
The company is also involved in hydraulic fracturing primarily in North America. Hydraulic fracturing is used in 90% of natural gas wells. A chemical called guar gum, which takes up a good percentage of expenses, is used by most of the companies for the fracturing of oil wells.
As it turns out the prices of guar gum have more than tripled since the December of 2011, which is dragging the profitability of the peers of our company. As far as Halliburton is concerned, the company was able to invent a substitute for the guar bean, which is expected to cut down the expenses incurred in hydraulic fracturing significantly.
Insider Buying
The director, Murray Gerber recently purchased over $1.1 million worth of the company’s stock. Insider buying is what attracts me the most, as it is the insiders that know what is really going on in the company. Also the purchase was carried out in the director’s personal capacity which clears out one thing that, the purchase was done because of the bright future envisioned by the director of the company.
Dividend Yield
The company has also been paying a dividend of 0.99% every year, for the past five years. The yield is low, but appears guaranteed looking at the five year history. Something is better than nothing right? Additionally, analysts expect the company to grow at the average rate of 21.30% for the next five years. If the company even meets the expectations, rather than exceeding them, investors could enjoy some great returns.
Beating the Competition
The main competitors of Halliburton Company are, Schlumberger Limited (NYSE: SLB) and Baker Hughes (NYSE: BHI). The comparative returns of the competitors over a period of 10 years show that Halliburton Company wins the race giving its investors 428% in returns.
In addition to the returns, Halliburton is the most undervalued stock amongst its competitors, with a healthy profit margin and price to sales ratio. Also the company has the highest retained earnings amongst its peers, which gives it the extra leeway for any strategic expansions or acquisitions.
|
Company |
P/E |
PEG |
Net Profit Margin |
Price/Sales |
Retained Earnings |
|
Halliburton Co. |
11.04 |
0.61 |
11.34% |
1.25 |
89.41% |
|
Schlumberger Ltd |
19.45 |
1.11 |
12.96% |
2.47 |
73.93% |
|
Baker Hughes Inc. |
11.97 |
0.71 |
8.67% |
1.04 |
85.75% |
In the recent quarterly financial results, a 21.9% jump in revenues compared to last year’s quarter was reported. International operating income increased $73 million year on year and the company had $2.2 billion in cash, which could be used for expansions and acquisitions. The results overall beat the market expectations with EPS of $0.8 compared to the estimated $0.75.
My Foolish Conclusion
Halliburton is operating in a thriving industry, which looks attractive. The insider buying and good numbers polish the luster of the stock. Analysts expect quite significant cuts in expenses due to the invention of guar gum’s substitute which would reflect as added profitability in the books of Halliburton. The company has been outperforming its peers over the last 10 years, and it is due to these reasons I expect an upswing in the stock’s price.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company and Schlumberger. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
