Why Halliburton, NOV, Baker Hughes are Compelling "Buys"
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oil well service providers rank amongst my favorite stocks. Overly beaten down from the Macondo oil spill, they trade at extremely low multiples despite impressive growth forecasts. I recommend thus buying stakes in Halliburton (NYSE: HAL), Baker Hughes (NYSE: BHI), and National-Oilwell Varco (NYSE: NOV). All are extremely undervalued and have seen growing demand abroad to fuel multiples expansion.
"Big Hal" is a leading producer in the field and, despite taking off 27.4% over the past 3 months, is still incredibly undervalued. Its historical 5-year average PE multiple is 14.8x, but the firm still trades at 10.7x past earnings. Analysts are currently very bullish on the stock and, according to FINVIZ.com, rate it a 1.8 out of 5 where "1" is a "buy" and "5" is a "sell." In my view, there are multiple reasons why this is the consensus:
The company has integrated its solutions in a way that is both efficient and practical for customers. While the dividend distribution is low, this is a good thing since the company is reinvesting earnings into a fast growing market. It has also innovated markets for frackers by creating PermStim, which substitutes for guar. The acquisition of Petris was also a very sound purchasing decision to better suit upstream businesses. This transaction will enable Big Hal to provide technical data about reservoirs to customers and influence their purchasing decisions.
While free cash flow trends have been weak (declining from $1.1 billion in 2Q08 on a TTM basis to $250 million in 2Q12, performance has still been great given the macro conditions. All of the last 3 quarters have bested consensus by an average of 8%. I believe that the bar has been set low for this industry leader, which results in higher risk-adjusted returns.
Baker Hughes & NOV
While I prefer an investment in Halliburton, Baker Hughes and NOV are still incredibly undervalued. Baker Hughes trades at a respective 11.4x and 11.1x past and forward earnings versus corresponding figures of 14.8x and 11.8x for NOV. Analysts forecast the latter to grow EPS annually by 13.3% over the next 5 years, 340 bps less than what is expected for Baker Hughes. In fact, Baker Hughes has a PEG ratio of 0.68, which indicates that future growth is nowhere close to being factored into the stock price. Analysts are nevertheless more bullish on NOV.
Perhaps the reason for the difference in analyst opinion is due to the fact that NOV grew by a meaningfully greater amount during the past 5 years. It could also be due to the high amount of capital expenditures that Baker Hughes is managing.
On a fundamental level, it is hard to say which one is more promising than the other. Legendary Billionaire value investor Warren Buffett recently purchased a stake in NOV. I am particularly optimistic about the company's takeover strategy to dilute fixed costs. Nine companies were taken over in the first half of this year alone. As extraction becomes increasingly difficult, upstream businesses will consult with those of the largest scale. In this way, NOV has a highly compelling future that is not being fully appreciated by the market.
Baker Hughes has seen impressive activity in the Gulf of Mexico and onshore assets. This business was driven by low natural gas prices that encouraged extraction. Even still, domestic operations were challenged by input inflation and an oversupply of pressure pumping papacy. This, however, was offset by strong performance abroad where demand rose in EMEA. Results have been so good that several analysts upped expectations after terrific earnings during the second quarter where margins notably increased. Higher inventory also prepares the company for rising demand during the full recovery. Accordingly, I recommend buying shares.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company and National Oilwell Varco. Motley Fool newsletter services recommend Halliburton Company and National Oilwell Varco. 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.