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Shares of Halliburton Company (NYSE: HAL) are trading up about 4 percent on Tuesday afternoon, after the company reported considerably better than expected results on Monday morning.
Following the earnings call, Citi analyst Scott Gruber and his team look into the company and conclude that “~$5 Pro Forma EPS in 2018 Points to ~90% Upside Long Term.”
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The Merger
Halliburton recently announced its intentions to merge with Baker Hughes Incorporated (NYSE: BHI), but the merger still has to be reviewed and approved by the Department of Justice -- by November 25, 2015.
The fact that Baker Hughes’ shares are trading below the value at deal completion indicate concerns regarding the approval, the experts explain, adding that, timing has slipped but they “still believe that approval is a high probability event, although with more divestments” which they think will total $6.5 billion of 2014 revenue.
After The Merger
If the merger were to occur, cost synergies are estimated to total $2 billion. However, upside to initial guidance in EBITDA has been greatly reduced. On the other hand, the post-merger buyback potential looks significant – total repurchase power could reach roughly $8.5 billion, excluding Baker Hughes’ cash.
The experts look at the longer-term and forecast only 6 percent deal accretion in 2018. Yet, given a “modest market recovery, share buybacks and synergies,” they anticipate earnings of $4.90 per share for 2018, 23 percent above 2014 earnings.
Forecasting wider margins, the firm raised its 2015-2018 estimates: FCF conversion should surge toward 80 percent (from around 30 percent) “as reinvestment requirements fade, which should propel the normal PE multiple to 16x versus 14x historically.”
Applying the 16x multiple to EPS of $4.90, Halliburton’s stock could reach $78.00. This represents 90 percent upside over the next three years. On the other hand, downside risk stands around 20 percent.
Citi maintains a Buy rating and $54.00 12-month price target on shares of Halliburton. However, ahead of the deal closure, Baker Hughes stands as its top pick on upside potential.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.