Stocks

ModernGraham Valuation: Schlumberger Ltd. (SLB)

moneyCompany Profile (obtained from Google Finance): Schlumberger Limited (Schlumberger N.V.) is the supplier of technology, integrated project management and information solutions to the international oil and gas exploration and production industry. The Company’s segments include Reservoir Characterization Group, which consists of the principal technologies involved in finding and defining hydrocarbon deposits; Drilling Group, which consists of the principal technologies involved in the drilling and positioning of oil and gas wells, and Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Completions, Artificial Lift, Well Intervention, Subsea, Water Services, Carbon Services and the Schlumberger Production Management field production projects.

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 = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  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 $59.84
MG Opinion Overvalued
Value Based on 3% Growth $59.49
Value Based on 0% Growth $34.87
Market Implied Growth Rate 6.71%
Net Current Asset Value (NCAV) -$1.63
PEmg 21.91
Current Ratio 1.97
PB Ratio 3.13

Balance Sheet – 9/30/2013 

Current Assets $25,093,000,000
Current Liabilities $12,753,000,000
Total Debt $9,916,000,000
Total Assets $65,123,000,000
Intangible Assets $19,355,000,000
Total Liabilities $27,238,000,000
Outstanding Shares 1,316,950,000

Earnings Per Share

2013 (estimate) $5.08
2012 $4.06
2011 $3.51
2010 $3.38
2009 $2.61
2008 $4.42
2007 $4.20
2006 $3.01
2005 $1.81
2004 $0.85
2003 $0.41
2002 $0.42

Earnings Per Share – ModernGraham 

2013 (estimate) $4.10
2012 $3.61
2011 $3.46
2010 $3.47
2009 $3.41
2008 $3.49

Conclusion:

Schlumberger Ltd. has achieved moderate growth and may be suitable for the Enterprising Investor.  For the Defensive Investor, the company fails to qualify due to a current ratio that is not quite strong enough and because it is trading at high PEmg and PB ratios.  However, the company passes all of the requirements of the Enterprising Investor, and investors following that strategy should feel comfortable proceeding with further research beginning with a review of other Enterprising Investor companies.  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $3.49 in 2008 to an estimated $4.10 for 2013.  The market is currently implying a growth rate of 6.71%, a rate that is higher than the historical growth can support.  As a result, the company would appear to be overvalued at the current time.

What do you think?  Do you agree that Schlumberger Ltd. is overvalued?  What would be your assessment?  Is the company only suitable for Enterprising Investors?  Leave a comment on our Facebook page 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 Schlumberger Ltd. (SLB) 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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