Oil Well Equipment Stocks to Buy Now

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The oil wells service industry has been one of my favorite bullish calls for some time. While they have rallied over the last few months, they still remain undervalued in light of weak domestic markets. I recommend buying to capitalize on greater industrial activity and operational changes. Consider these stocks...

Halliburton (NYSE: HAL) Still Undervalued

In my view, Halliburton is one of the most attractive stocks on the Street. It is valued at a PEG ratio of only 0.6x, which indicates that future growth has come nowhere close to being fully factored into the stock price. The bears, like analyst Global Hunter, argue that, though pumping margin erosion can be contained, under-utilization of horsepower may end up delaying a pricing recovery well off into the future. In my view, though the CEO recently guided for bumpy domestic business in the next few quarters, management is taking the right approach to forgo lower-priced business and, instead, build up inventories and cut costs should production slow.

Analysts also forecast Halliburton growing EPS by 17.2% annually over the next five years. With multiples well below the historical average levels, the potential for outsized returns is substantial through just the value gap being closed. Despite being in a capex-heavy industry, Halliburton has also been able to deliver double-digit ROA, ROE, and ROI. During the most recent quarter, management also showcased its ability to weather cost pressures through strong performance in completion & production and drilling & evaluation, the latter of which gained 11.7%. Strong international business in Canada, the Middle East, Canada, and Latin America is also offsetting domestic weakness. As it migrates away from North America, this catalyst should come to greater light.

On a final note, I am also optimistic about the company's acquisition strategy. Since it's hard to count on organic growth under such a challenging market, it makes sense to diversify and vertically integrate. Towards that end, the decision to purchase Petris Technology, an oil & gas data manager, will help the company better service customers.

Buy Schlumberger (NYSE: SLB) over Baker Hughes (NYSE: BHI)

There are several reasons why I find Schlumberger more undervalued than Baker Hughes. The first point has to do with geographical focus. Whereas less than half of Baker Hughes' business is abroad, for Schlumberger the figure is at more than 70%. Domestic markets have been weak from cost pressures in recent years, and a growing portion of oil & gas exploration will take place internationally.

Second, Schlumberger is the largest oil well service provider and thus commands a strong economic moat. Analysts rate it a 1.7 out of 5 where "1" is a "buy" and project a 16.5% annual EPS growth rate over the next five years. With nearly a $90 price target on the Street, wind is working in the company's favor. But the company has actually exceeded expectations and posted a solid third quarter performance relative to Baker Hughes. EPS of $1.08 took off from momentum in EMEA and, though revenues fell short of forecasts by $70 million, EPS of $1.08 still came out ahead by $0.02.

Moreover, operations have been more consistent at Schlumberger than Baker Hughes. While profits actually rose 9.5% for the former, they fell 60% for the latter. Perhaps even more disappointing was that international business was particularly weak for Baker Hughes. Management still argues that international business will rebound, but consensus outlooks have dropped and are likely to continue to drop.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company. 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.

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