Schlumberger Rally Can Continue Amid Upgrades
The stock should stay hot given that we're in "the sweet-spot of the oilfield services upcycle."
Early Wednesday, HSBC analyst Phillip Lindsay upgraded shares of the oilfield service giant to Overweight from Neutral, and increased his target price by $30, to $135.
The upgrade follows Schlumberger's (ticker: SLB ) upbeat analyst day late last month. Lindsay writes that "new technology introductions [will be] driving market share gains and incremental margins," and adds, "if Schlumberger can deliver this ambitious level of operational performance, we think there is ample cushion to outperform its financial objectives – perhaps significantly."
Other firms have grown more constructive, too. On Friday, Argus Research's Michael Burke raised his target price on the stock from $121 to $150, which came less than a week after Credit Suisse's James Wicklund increased his target from $120 to $137, calling the company "open, honest, confident and impressive" following the June 25 meeting with analysts.
While the stock was little changed today, at a recent $116.54, we expect more gains, too.
Although Schlumberger is flirting with new highs, the company's impressive growth track appears to justify further price appreciation. At its analyst day, Schlumberger said it expects earnings per share to grow at an average annual rate of 17% to 20% and is targeting a return on capital above 20%. Although its 1.4% yield isn't as high as many might like, Schlumberger forecast returning over 75% of earnings back to stockholders in the form of dividends and share repurchases in the coming years.
"We see significant medium-term attractions to the Schlumberger story based on a strengthening earnings trajectory, and an improving financial returns and free cash flow profile," writes Lindsay.
Schlumberger, a best-in-breed firm, is benefitting from tailwinds that should continue for several years. Schlumberger has always invested in research and development, which means that its technologies are the go-to products for oil companies ramping up production and looking to tap increasingly difficult reserves.
"The combination of attractive West Texas Intermediate [oil] prices, rising capital expenditure budgets, [and] strong rig/well count trends suggest we are in the sweet-spot of the oilfield services upcycle," writes Susquehanna analyst Charles Minervino, who notes his earnings estimates are well above consensus for Schlumberger. "Industry dynamics are improving, capacity is tightening, and pricing is rising in the U.S., which should be catalysts for upward revisions to EPS estimates for 2014-2016."
Schlumberger also has a clean balance sheet and operations in growing areas like arctic and deep-sea drilling.
Schlumberger is up more than 26% since Barrons.com recommended shares earlier this year, easily outpacing the Standard & Poor's 500's 5.9% gain. (See Weekday Trader, "Undervalued Schlumberger Could Rise 28%," Feb. 27.)
Trading at more than 17 times forward, Schlumberger isn't as cheap as it was in February, but given the company's strong outlook, shares remain below historical valuation levels.
"Were Schlumberger to simply hold their pre-meeting multiple in the mid to high teens, it is not hard to envision significant upside from here on targets that could prove conservative given that we do expect a meaningful recovery in U.S. gas directed activity and some international pricing/mix improvement," according to Deutsche Bank analyst Mike Urban who writes that Schlumberger is "increasingly entering a new league: A global mega-cap growth company."
Indeed, Schlumberger's strong growth in an expanding industry puts it in a league of its own.