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ModernGraham Valuation: Halliburton Company (HAL)

moneyCompany Profile (obtained from Google Finance): Halliburton Company is an oilfield services company. The Company is provider of services and products to the energy industry related to the exploration, development, and production of oil and natural gas. It serves national, and independent oil and natural gas companies worldwide and operates in two segments: Completion and Production segment and Drilling and Evaluation segment. The Company conducts business worldwide in approximately 80 countries. The business operations of its divisions are organized around four primary geographic regions: North America, Latin America, Europe/Africa/CIS, and Middle East/Asia. During the year ended December 31, 2011, based on the location of services provided and products sold, 55% of its consolidated revenue was from the United States. In October 2011, the Company completed the acquisition of Multi-Chem Group, LLC. In August 2012, its Landmark Software and Services acquired Petris Technology Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $42
MG Opinion Overvalued
Value Based on 3% Growth $37
Value Based on 0% Growth $21
Market Implied Growth Rate 6.21%
Net Current Asset Value (NCAV) -$2.68
PEmg 20.92
Current Ratio 2.71
PB Ratio 3.49

Balance Sheet – 9/30/2013 

Current Assets $12,890,000,000
Current Liabilities $4,762,000,000
Total Debt $7,816,000,000
Total Assets $27,948,000,000
Intangible Assets $2,125,000,000
Total Liabilities $15,160,000,000
Outstanding Shares 847,000,000

Earnings Per Share – Diluted

2013 (estimated) $2.33
2012 $2.78
2011 $3.26
2010 $1.97
2009 $1.28
2008 $2.17
2007 $2.66
2006 $2.16
2005 $2.27
2004 $0.44
2003 $0.39
2002 -$0.4

Earnings Per Share – Modern Graham (Calculating EPSmg)

2013 (estimated) $2.52
2012 $2.51
2011 $2.33
2010 $1.93
2009 $1.98
2008 $2.20

Conclusion:

Halliburton Company should be on the radar of both Defensive Investors and Enterprising Investors.  It does not meet the requirements for the Defensive Investor at this time, but the only tests it failed were related to the PEmg ratio and the PB ratio (both are too high).  As these tests are both related to the price, it is very possible the company could become suitable for Defensive Investors if the price were to drop a bit.  Halliburton Company does pass all of the requirements of the Enterprising Investor, and as such this investor type should continue with further research.  From a valuation standpoint, the company appears to be slightly overvalued.  The EPSmg (normalized earnings) have grown from $2.20 in 2008 to an estimated $2.52 for 2013, a level of growth that does not support the market’s implied estimate of 6.21%.

What do you think?  Is Halliburton Company overvalued?  Is the company suitable only for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Halliburton Company at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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