Schlumberger
Solomon's Select, by Mark Robertson, Managing Partner April 1st, 2012
With a low total return forecast of 17%, a PAR at least in the high teens ... SLB is approximately 32% off the highs achieved during 2011.
In honor of Daniel Day Lewis, “There Will Be Oil.” That’s right, we’re going back to the well and selecting a previously featured stock that performed quite well for us — Schlumberger (SLB). With a low total return forecast of 17%, a PAR at least in the high teens … SLB is approximately 32% off the highs achieved during 2011.
Schlumberger is the world’s leading oilfield services company. I think that’s “nuff said.”
Schlumberger (SLB): Solomon Score Card. SLB fared well when selected back in November 2008 proceeding to gain nicely during a period when the Wilshire 5000 sagged.
Schlumberger (SLB): Business Model Analysis. Large company, growing at 12-14% for a long-term trend. Impressive. Yes, a global recession (gray shaded area) would be a headache.
Schlumberger: 7-Year Price Chart. We never promised you “no bumps.” Hey, with a launching reference to Daniel Day-Lewis, how could we? Our last round trip worked out pretty well. We have a feeling there’s enough gasoline-guzzling round trips out there to keep Schlumberger’s talented teams busy for quite some time to come. The relative strength index circa 30 (potentially oversold) is a bonus.
Growth, Profitability and Valuation
Our sales growth forecast for Schlumberger is 12.6%. This is based on analyst consensus forecasts and a regression from 2012-2015 and influenced by the cycles dating back to at least 2004. We also point out that the relatively large acquisition of Smith International in 2010 skews things a bit and encourages an emphasis on the post-2010 portion of the business model analysis.
The historical net margin (2005-2011) checks in at 16.3%. Value has a 3-5 year projected net margin of 14.2%. We’re using 12.9% — a median for the span 2001-2015 that recognizes this can periodically be about bubbles. Black gold. Texas tea.
The seven year trailing average average P/E is 21.5×. Based on consensus and industry analysis, we’re assigning a projected average P/E of 20×.
At a stock price of $68.69, the projected annual return is approximately 18%. The quality rating is 72.5 (excellent) and the financial strength rating is 95 (A+).
What about slower growth in China? It’s a clear and present reality … but in the larger scheme of things, this too shall pass and the growth in guzzling will be unabated over the long term.
The Motley Fool selected Schlumberger as one of their top 5 energy stocks for 2012. “The current slowdown in U.S. natural gas drilling may have an impact on quarterly results in the near term. But the long-term outlook remains strong. As hard-to-reach oil and gas reserves become more widespread, companies that help find and extract these hydrocarbons become more and more important. Service stocks like Schlumberger are poised to benefit in the future.”
I don’t know if Jed Clampett kept any of the family wealth in the Netherlands Antilles, but Mr. Drysdale would know. Beverly. Hills that is. Welcome back to the Solomon Select tracking portfolio, Schlumberger.
Mark Robertson
Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.