Benjamin 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 with a Low Beta. 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 Halliburton Co. (HAL) fares in the ModernGraham valuation model.
Company 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 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 – PASS
- 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 – FAIL
- 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
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$44.08|
|Value Based on 0% Growth||$25.84|
|Market Implied Growth Rate||6.50%|
|Net Current Asset Value (NCAV)||-$2.43|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Halliburton is suitable for Enterprising Investors but not for Defensive Investors. The Defensive Investor is concerned with the lack of sufficient earnings growth over the last ten years and the high price-to-earnings and price-to-book ratios. The company passes all of the requirements of the Enterprising Investor. As a result, Enterprising 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 through a review of ModernGraham’s valuation of Schlumberger Ltd (SLB) and ModernGraham’s valuation of Baker Hughes (BHI). From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.93 in 2010 to an estimated $3.04 for 2014. This level of demonstrated growth supports the market’s implied estimate of 6.5% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value that is within a margin of safety relative to the price.
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 Halliburton Inc. (HAL)? 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.
Be sure to review the previous ModernGraham Valuations of Halliburton Inc. (HAL)!
Disclaimer: The author did not hold a position in Halliburton Inc. (HAL) or 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; this article is not affiliated with the company in any manner.