Can Schlumberger Withstand This Rigorous Yet Simple Test?

As I was researching a few oil companies and trying to stay on top of all the happenings within the industry, I suddenly realized that I was getting caught in the noise of the market. Oil prices are declining on a daily basis, news flashing are everywhere about a catastrophic hit on energy stocks. It’s tough not to listen to all that madness. I completely forgot about rule no1: ” Don’t pay attention to the Market“. Easier said than done my friends!

 

While reflecting on my profound moment, I decided to stick with the basics and go back to the old school approach. That’s right, I am talking about Benjamin Graham & Warren Buffet school of thought. Therefore I simply took a stand of a Defensive investor’s* approach developed by Graham and consulted my stock software.

*Think conservative, extremely cautious and “play it safe” type of investing.

Here are my findings on “Schlumberger(NYSE:SLB)” using 7 key criteria ( Defensive Investor) approach:

1. Adequate size of the Enterprise: Considering the size of this was an easy one. Their market cap is $104B, we were looking for anything over $2B. Result: PASS

2. Strong Financial Condition*: Ratio of Total Assets to Total Liabilities needs to be at least 2. This test of 2-to-1 ratio is very important because it is saying that the company has a solid cushion of working capital available. This means that they can survive tough times like these and remain in their comfort zone. They even managed to improve this ratio despite a devastating second half of 2014. At the end of 2013 this ratio was 1.96.

*Latest quarter (Q4’14) reports this ratio to be 2.04 so therefore I am giving a positive score on this one. Result: PASS

3.Earnings Stability:We are after at least 10 years of positive EPS. SLB is looking good again. Result: PASS

4. Dividend Record: Graham was chasing after 20 years of consecutive dividend payments. My software uses 10 years, which is a personal preference of mine. Whether you pick 10 or 20, SLB has been paying dividends since 1992. Result: PASS

5. Earnings Growth:Here we are looking for an EPS increase of at least 1/3 (33%) over the past 10 years using 3 year averages at the beginning and the end of a period. (Average EPS from 2004-2006 and 2012-2014 are our start and end points). SLB increased their EPS by 1.45( 145%) using this method. Result: PASS

Note: 33% is a very conservative measure. Even if we rise the stakes to at least 50% increase, or 4% average annual rise, SLB still passes with flying colors.

6. Moderate P/E Ratio: Graham is looking for nothing more than P/E ratio of 15 times the average of the past three year earnings. If we do the math that way current price is $81.22 and average EPS was $4.77 which gives us P/E ratio of 17. ‘s actual P/E ratio is 15.27 (price divided by current EPS). This can get tricky, considering that my software currently uses 20 as a last possible P/E limit (personal preference, I think 15 is extremely conservative and outdated). *2003 update of Graham’s method recommends a P/E ratio of 17 as the maximum (Updated by Jason Zweig, The Intelligent Investor)

Graham(original)- Result: FAIL

Graham (Considering updated calculation)- PASS

Software- Result: PASS

7. Moderate P/B Ratio: We are going after a ratio of Price that is 1.5 times below book value. failed this one considering their current P/B ratio of 2.69. Graham used one more measure to help with this ratio. As a rule of thumb he suggested that P/E ration x P/B ratio shouldn’t exceed 22.5. No matter which way you take this, their P/B ratio is pretty high (2.69). Result: FAIL

Software Screenshot

Conclusion

Now that we have completed the basic screening of SLB , it’s time to have real fun. This method is just that- a screening. It shows you some basic performance of over the years, and it shows very favorable results. Think of this test as a yard stick measure. You took it and it seems like that has some positives going for them, and some not so positive things (like high P/B ratio). There are more factors and methods that need to be considered (balance sheets, income statements, earnings conference calls, management styles, overall business model, future of the industry, etc). That would require you to do extensive financial analysis on your own and discover some additional insights about the company.

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s