Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ 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. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Schlumberger Ltd fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â 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 Companyâ€™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 Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$59.59|
|Value Based on 0% Growth||$34.93|
|Market Implied Growth Rate||7.62%|
|Net Current Asset Value (NCAV)||-$1.08|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Schlumberger Ltd passes all of the requirements of the Enterprising Investor, but does not qualify for the Defensive Investor. Â The company’s current ratio is too low while the PEmg and PB ratios are too high for the Defensive Investor. Â As a result, Enterprising Investors following the ModernGraham approach based onÂ Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors through a review of 5 Undervalued Companies for the Enterprising Investor while keeping in mind the 7 Key Tips to Value Investing. Â From a valuation side of things, the company appears to be overvalued. Â The company’s EPSmg (normalized earnings) have grown from $3.41 in 2009 to $4.11 in 2013, a demonstrated level of growth that does not support the market’s implied estimate of 7.62% earnings growth. Â The low demonstrated growth leads the ModernGraham valuation model to return an intrinsic value estimate that falls below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Schlumberger Ltd (SLB)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Schlumberger Ltd (SLB) or any of the other companies listed 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; this article is not affiliated with the company in any manner.