April 22, 2013
Recommendation: D-rated Sell
Welcome to the Stock of the Day for April 22, 2013. On an otherwise lackluster Monday morning, energy services titan Halliburton Co. (HAL) is grabbing headlines with its surprising first-quarter earnings announcement. After spending months in sell territory, could this be just what the stock needs for its next big push?
Company Profile: With roots that go back to 1919, Halliburton is a leading supplier of technical products and services to oil and gas companies. In total, Halliburton operates thirteen product service lines, encompassing clean energy, deepwater operations, heavy oil and more. The company currently has operations in more than 80 countries and boasts a workforce of 72,000 employees. With nearly $29 billion in annual sales, the company gets about 60% of its revenue from the U.S. and 40% from abroad.
Earnings Buzz: In the first quarter, Halliburton was hit by a rig count decline as well as pricing headwinds in North America. On top of this, the company's profits were also weighed down by charged related to the 2010 Deepwater Horizon accident. So while Halliburton did expand its international footprint last quarter, the company posted a net loss of $18 million. Excluding the Macondo litigation charges, adjusted income weighed in at $0.89 per share. Analysts forecast earnings of $0.57 per share, so Halliburton posted a 56% earnings surprise. Compared with the same quarter last year, total revenue climbed 2% to $6.97 billion; this also topped the $6.88 billion consensus estimate. Shares of HAL are climbing today on the sales and earnings surprises, but I wouldn't take the bait. Next quarter, Halliburton is headed towards a 13% drop in earnings, and sales are expected to remain largely flat.
Competition Breakdown: As you could guess, Halliburton is one of 183 companies in the Oil & Gas Equipment & Services industry. Of these, Halliburton ranks in the top 10% in terms of market cap and its 1.3% dividend yield (both 13th). Meanwhile, the company also beats the industry average in terms of long-term growth rate and return on equity (both 32nd), earnings growth (69th) and sales growth (79th). However, as you'll see shortly, this is merely a reflection of how weak things are in this industry as a whole; Halliburton does not have a strong balance sheet. If you plug Halliburton's top competitors into Portfolio Grader—Baker Hughes Inc. (BHI) and Schlumberger Ltd. (SLB)—you see that both of these companies are suffering from anemic top- and bottom-line growth as well as downright abysmal cash glow. BHI is a C-rated hold while SLB is a D-rated sell.
Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. For much of the past year, this conservatively-ranked stock has been at a D-rated sell. Now, in March, buying pressure improved to the point where I tentatively upgraded the stock to a hold, but over the weekend my screens detected that buying pressure had once again erroded. So HAL currently receives a D for its Quantitative Grade; this has dragged the stock back into sell territory. On the fundamentals side, the only bright spots are Halliburton's return on equity (A-rated) and the recent round of analyst earnings revisions (B-rated). However, when it comes to operating margin growth, earnings growth and earnings momentum, Halliburton outright fails (D-ratings); sales growth, cash flow and the company's track record of earnings surprises are also mediocre (C-ratings). So HAL receives a C for its Fundamental Grade.
Bottom Line: As of this posting, April 22, I consider HAL a D-rated Sell.
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