Oppenheimer initiated coverage on Halliburton Company HAL with an Outperform rating and $71 price target.
Analyst James Schumm noted that “Halliburton's stock has retreated ~40 percent in conjunction with falling oil prices and the proposed merger with Baker Hughes. However, we believe the risk/reward is skewed very positively as the market is pricing in significant reductions in activity and, we think, taking a myopic view on the combination with Baker.
“The proposed merger will create a more valuable entity that can more effectively compete with Schlumberger internationally and will remove a major competitor from the marketplace. Meanwhile, Halliburton continues to implement self-help measures to improve profitability, FCF generation and strengthen its balance sheet.”
Schumm believed investors who “look past the uncertainty in 2015 will be handsomely rewarded over the next two years.”
The analyst report claimed that “despite potential headwinds from lower oil prices, we believe these will be offset by improvements in the underlying business. A reduction in Halliburton’s capital intensity and an expected improvement in margins are estimated to lead to substantial free cash flow generation which will support further share repurchases and strengthen its solid balance sheet.”
Schumm concluded that the “current valuation does not reflect the quality of this business.”
The $71 price target was derived using 13x the firm’s 2016E HAL-BHI EPS estimates and 7x EEV/EBITDA.
Halliburton recently traded at $41.44, up 3.19 percent.
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