SLB Stock Study (7-15-24)

Posted by Mark on August 30, 2024 at 06:51 | Last modified: July 14, 2024 12:26

I recently did a stock study on Schlumberger, Ltd. (SLB) with a closing price of $46.42.

M* writes:

     > SLB is the largest oilfield service firm in the world, with
     > expertise in myriad disciplines, including reservoir
     > performance, well construction, production enhancement, and
     > more recently, digital solutions. It maintains a reputation
     > as one of the industry’s leading innovators, which has
     > earned it dominant share in numerous end markets.

Over the past 10 years, this large-size company has grown sales and EPS at annualized rates of -4.0% and 18.3%, respectively. EPS is negative in ’16, ’17, ’19, and ’20. Both sales and EPS have declined overall. Lines are not up, straight, and parallel. This is a visual inspection failure.

SLB tops a recent Manifest Investing stock screen (7/9/24 “Bull Sessions”) when sorted by Manifest Rank: PAR + Quality rank.

Most importantly, it fails visual inspection while having the highest possible Quality score. I thought Quality was related to visual inspection, earnings predictability/consistency, R^2, etc. According to the Manifest glossary: “[Quality is] built from four major characteristics… financial strength, earnings stability, relative sales growth and relative profitability.”

Over the past decade, management metrics are consistent with failed visual inspection. PTPM is roughly even with peer and industry averages while ranging from -47.9% in ’20 to 15.9% in ’23 with a last-5-year mean of -7.6%. ROE has a similar profile and negative last-5-year mean. Debt-to-Capital is roughly even with peer and industry averages while increasing from 26.0% (’14) to 37.2% (’23) with a last-5-year mean of 44.8%.

Quick Ratio is 0.91 and Interest Coverage is 12.0 per M* who also gives an “Exemplary” rating for Capital Allocation. Value Line grades the company B++ for Financial Strength.

With regard to sales growth:

• YF projects YOY 3.2% and 13.6% for ’24 and ’25, respectively (based on 24 analysts).
• Zacks projects YOY 12.2% for both ’24 and ’25 (7 analysts).
• Value Line projects 11.8% annualized growth from ’23-’28.
• CFRA projects 11.8% YOY and 11.6% per year for ’24 and ’23-’25, respectively.
• M* provides 2-year annualized ACE of 15.5%.

My 6.0% per year forecast is toward the lower end of the range.

With regard to EPS growth:

• MarketWatch projects 18.4% and 17.4% per year for ’23-’25 and ’23-’26, respectively (based on 34 analysts).
• Nasdaq.com projects 20.8% YOY and 15.7% per year for ’25 and ’24-’26 [13, 9, and 2 analyst(s) for ’24, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 13.1%.
• YF projects YOY 8.4% and 18.0% for ’24 and ’25, respectively (26), and 5-year annualized growth of 19.4%.
• Zacks projects YOY 17.8% and 20.8% for ’24 and ’25, respectively (9), and 5-year annualized growth of 14.8%.
• Value Line projects 19.7% annualized growth from ’23-’28.
• CFRA projects 18.5% YOY and 19.1% growth per year for ’24 and ’23-’25 along with 3-year CAGR of 15.0%.
• M* projects long-term annualized growth of 14.4%.

My 9.0% per year forecast is below the long-term-estimate range (mean of five: 16.3%) especially because the historical record suggests a good chance of negative years going forward. I will use ’23 EPS of $2.91/share as the initial value rather than 2024 Q1 $3.01 (annualized).

My Forecast High P/E is 19.0. Over the past decade, high P/E [is NMF four times but] ranges from 21.6 in ’23 to 58.4 in ’15 with a last-5-year mean (composed of only three numbers due to 2 NMF’s) of 24.3 and a last-5-year-mean average P/E of 19.4. I am below the range.

My Forecast Low P/E is 12.0. Over the past decade, low P/E [is NMF four times but] ranges from 12.5 in ’22 to 40.8 in ’15 with a last-5-year mean (composed of only three numbers due to 2 NMF’s) of 14.4. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) is the default $34.90 based on initial value from above. This is 24.8% less than the previous closing price and 18.1% less than 52-week low.

Over the past decade, Payout Ratio (PR) ranges from 27.2% in ’22 to 130.7% in ’18 with a last-5-year mean of 33.1%. Four of 10 years have PR of NMF, but a dividend is paid every year albeit substantially less in some. To account for the latter, my forecast is well below the range at 10.0%.

These inputs land SLB in the BUY zone with a U/D ratio of 3.4. Total Annualized Return (TAR) is 13.4%.

PAR (using Forecast Average—not High—P/E) of 9.0% is less than I seek for a large-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 35 studies in the past 90 days (my study and 13 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 12.7%, 12.0%, 21.4, 14.1, and 33.1%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 13.5 that is less than MS (17.8) and less than mine (15.5).

MS high / low EPS are $5.26 / $2.93 versus my $4.48 / $2.91 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $7.15 soars above both.

MS LSPF of $37.90 implies a Forecast Low P/E of 12.9: less than the above-stated 14.1. MS LSPF is 8.3% less than the default $2.93/share * 14.1 = $41.31 resulting in more conservative zoning. MS LSPF is 8.6% greater than mine, however.

With regard to valuation, PEG is 0.9 and 1.6 per Zacks and my projected P/E, respectively: both fairly valued (and lower than what I usually see). Relative Value [(current P/E) / 5-year-mean average P/E] is slightly low at 0.79.

I think MOS is robust because my inputs (including most-recent-quarter initial value) are near or below respective analyst/historical ranges. Comparison with MS is limited because of the small sample size, but I am lower than those inputs too. As anecdotal reference, MS TAR of 21.2% is 7.8% per year greater than mine.

Per U/D, SLB is a BUY under $47/share. BI TAR criterion is met < $43 given a forecast high price ~$85.

I would be all over this stock if visual inspection were consistent with its Manifest Quality Rank. Because it’s not, I will personally wait until TAR criterion is met and then limit position size as a more speculative investment.

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