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Helmerich & Payne Quarterly Valuation – October 2014 $HP

logo_HPIBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies to Research for the Defensive Investor – October 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Helmerich & Payne (HP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Helmerich & Payne, Inc. is engaged in contract drilling of oil and gases wells for others and this business. The Company’s contract drilling business is composed of three reportable business segments: U.S. Land, Offshore and International Land. During the fiscal year ended September 30, 2012 (fiscal 2012), the Company’s U.S. Land operations drilled in Oklahoma, California, Texas, Wyoming, Colorado, Louisiana, Pennsylvania, Ohio, Utah, Arkansas, New Mexico, Montana, North Dakota and West Virginia. Offshore operations were conducted in the Gulf of Mexico, and offshore of California, Trinidad and Equatorial Guinea. During fiscal 2012, the Company’s International Land segment operated in six international locations: Ecuador, Colombia, Argentina, Tunisia, Bahrain and United Arab Emirates. The Company is also engaged in the ownership, development and operation of commercial real estate and the research and development of rotary steerable technology.

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

  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 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

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

Key Data:

Recent Price $82.23
MG Value $193.01
MG Opinion Undervalued
Value Based on 3% Growth $80.97
Value Based on 0% Growth $47.46
Market Implied Growth Rate 3.11%
Net Current Asset Value (NCAV) -$3.88
PEmg 14.73
Current Ratio 2.89
PB Ratio 1.87

Balance Sheet – June 2014

Current Assets $1,450,000,000
Current Liabilities $502,000,000
Total Debt $80,000,000
Total Assets $6,693,000,000
Intangible Assets $0
Total Liabilities $1,874,000,000
Outstanding Shares 109,300,000

Earnings Per Share

2014 (estimate) $6.23
2013 $6.79
2012 $5.34
2011 $3.99
2010 $1.45
2009 $3.31
2008 $4.34
2007 $4.27
2006 $2.77
2005 $1.23
2004 $0.05

Earnings Per Share – ModernGraham

2014 (estimate) $5.58
2013 $4.90
2012 $3.86
2011 $3.24
2010 $2.99
2009 $3.57

Dividend History

Conclusion:

Helmerich & Payne is suitable for either the Defensive Investor or the Enterprising Investor.  In fact, the company passes all of the requirements of both investor types, which is a very rare accomplishment.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.99 in 2010 to an estimated $5.58 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 3.11% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out previous ModernGraham valuations of Helmerich & Payne (HP) for a better perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Helmerich & Payne (HP)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Helmerich & Payne (HP) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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