Schlumberger Limited (NYSE:SLB) shares are down more than -22.53% this year and recently decreased -1.06% or -$0.7 to settle at $65.04. Halliburton Company (NYSE:HAL), on the other hand, is down -18.27% year to date as of 11/13/2017. It currently trades at $44.21 and has returned -1.93% during the past week.
Schlumberger Limited (NYSE:SLB) and Halliburton Company (NYSE:HAL) are the two most active stocks in the Oil & Gas Equipment & Services industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect SLB to grow earnings at a 44.46% annual rate over the next 5 years. Comparatively, HAL is expected to grow at a 20.40% annual rate. All else equal, SLB’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 15.76% for Halliburton Company (HAL). SLB’s ROI is -1.50% while HAL has a ROI of -22.60%. The interpretation is that SLB’s business generates a higher return on investment than HAL’s.
The value of a stock is simply the present value of its future free cash flows. SLB’s free cash flow (“FCF”) per share for the trailing twelve months was +0.44. Comparatively, HAL’s free cash flow per share was +0.70. On a percent-of-sales basis, SLB’s free cash flow was 2.19% while HAL converted 3.84% of its revenues into cash flow. This means that, for a given level of sales, HAL is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. SLB has a current ratio of 1.50 compared to 2.20 for HAL. This means that HAL can more easily cover its most immediate liabilities over the next twelve months. SLB’s debt-to-equity ratio is 0.43 versus a D/E of 1.19 for HAL. HAL is therefore the more solvent of the two companies, and has lower financial risk.
SLB trades at a forward P/E of 29.44, a P/B of 2.28, and a P/S of 3.11, compared to a forward P/E of 20.85, a P/B of 4.18, and a P/S of 2.08 for HAL. SLB is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. SLB is currently priced at a -13.25% to its one-year price target of 74.97. Comparatively, HAL is -16.63% relative to its price target of 53.03. This suggests that HAL is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for SLB and 1.80 for HAL, which implies that analysts are more bullish on the outlook for SLB.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. SLB has a beta of 1.04 and HAL’s beta is 1.07. SLB’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.SLB has a short ratio of 2.99 compared to a short interest of 2.78 for HAL. This implies that the market is currently less bearish on the outlook for HAL.
Halliburton Company (NYSE:HAL) beats Schlumberger Limited (NYSE:SLB) on a total of 9 of the 14 factors compared between the two stocks. HAL is growing fastly, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, HAL is the cheaper of the two stocks on an earnings and sales basis, HAL is more undervalued relative to its price target. Finally, HAL has better sentiment signals based on short interest.