Halliburton Silently Drops With Oil

The following was originally published at The Morning Monte.

When looking for stocks to write about, I usually look at the day's big movers and try to get an idea what is driving the moves. Big movers can be sources of opportunity. Big movers also have the benefit of being fun to research, and usually there is a lot of chatter around why they surged or tanked.

One of Tuesday's big movers was Halliburton Company HAL. While Halliburton doesn’t have anywhere close to the market cap of giants like Exxon Mobile Corporation XOM, Apple Inc AAPL or Microsoft Corporation MSFT, its $38 billion market cap does make it a huge company. So, when its stock price drops by almost 4%, one would think that people would notice.

After a fairly significant move, it seems very odd to me that the top story listed about Halliburton on Yahoo! Finance was “Halliburton Headed Higher Despite Failed Merger.” This was published after the market had closed with HAL being so far down. The other prominent article was “Halliburton (HAL) Touches 52-Week High as Crude Rallies.” Maybe everyone is on vacation. (New York has been hot this summer.) Anyway, I like to look at the fundamentals, so here we go.

Halliburton is expected to lose money this year. That isn’t necessarily a bad thing as a lot of good companies lose money for a time. The issue at first glance is the long-term implied growth rate of residual earnings, which stands at 9.45%. Halliburton is a mature company, so for it to achieve that kind of growth and be worth its current share price it not only has to stop losing money, it really has to grow its earnings.

It doesn’t help that the share price is close to a 52-week high. I quick look at the value breakdown shows that the company does have a sizable book value ($18/share), but a simple model values Halliburton at only $11/share if residual earnings do not grow. A quick look at the value breakdown reveals that future (read: speculative) growth is the man component of Halliburton’s current stock price. The market must really feel that it is going to turn around.

A quick look at a Monte Carlo shows the stock to most-likely be overvalued. Now, be careful, this is an initial pass. The Halliburton story is no doubt complicated, so further investigation would be necessary to be more confident. However, using current analyst estimates and optimistic growth assumptions, the value distribution looks like this. 

I see a chart like this and ask myself how the average rating on Yahoo! is between a buy and a strong buy. Maybe they know something I don’t. I can confidently say right now that I don’t know whether there is an investment opportunity with Halliburton at the moment. However, if I were to take a closer look, it would be to see if there were a short opportunity. On the face of it, it doesn’t seem like a strong buy to me or even worth its current price. Maybe people are betting on an oil rebound… I would love to hear what you think.

The Morning Monte is “high-level,” and any investment requires a deeper analysis than is presented here. The comments in The Morning Monte are intended to help guide your research and ground you in the fundamentals. In no way should the comments in The Morning Monte be taken as advice to buy or sell a particular equity. Some of the statements are forward looking. As such, these statements are speculation–so beware! The comments represent the views of the author and are not necessarily the views of The Morning Monte™ or PRUDENA™.

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