Companies under analysis

Dupont

Growth rate

Market multiple

Direct free cash ow

Residual income

Conclusion

The Mosaic of Stock Analysis

Part 3: Competitive analysis using nancial ratios
...with a hint of DCF analysis

David J. Moore, Ph.D.

www.efcientminds.com

February 11, 2013

Companies under analysis

Dupont

Growth rate

Market multiple

Direct free cash ow

Residual income

Conclusion

Proposed company and alternates

Proposed company: Schlumberger (SLB) Alternates identied by J.O. screen (see JO_screen tab in spreadsheet):
Baker Hughes (BHI) Halliburton (HAL)

SLB, BHI, and HAL are the only three companies in the Oil / Energy Sector and Oil Field Services industry that pass the J.O. Cornerstone Value I screen.

Companies under analysis

Dupont

Growth rate

Market multiple

Direct free cash ow

Residual income

Conclusion

DuPont cross-sectional and time-series analysis

Operational efciency
SLBs PM is higher than both BHI and HAL but is on the decline. HALs PM is on the rise as is BHI.

Asset management
SLBs asset management is improving but still lags both HAL and BHI HAL has the best asset turnover ratio

Leverage - BHI has the lowest leverage, SLB and HAL are comparable Overall
HALs ROE advantage is due primarily to superior total asset turnover (TATR). In other words, HAL is doing the best job at generating sales per dollar of assets.

Advantage: HAL.

Companies under analysis

Dupont

Growth rate

Market multiple

Direct free cash ow

Residual income

Conclusion

Growth rate comparisons

Internal growth rate - ability to grow without external nancing
SLB (7.2%) is lagging behind HAL (11.9%) in ROA but is ahead of BHI (6.3%). Fortunately, 7.2% is above our presumed long-run growth rate of 62/3%. We can not say this for BHIs 6.3% internal growth rate. Therefore, our presumed long-run growth rate of 62/3% is a safe bet for SLB and HAL but not so much with BHI.

Sustainable growth rate - ability to grow with external funds without altering debt ratio
SLB (13.3%) is higher than BHI (10.2%) but lower than HAL (23.4%)

Advantage: HAL.

Companies under analysis

Dupont

Growth rate

Market multiple

Direct free cash ow

Residual income

Conclusion

Market multiple results

SLB is trading at a P/E of 18, below its historical average of 21. However, BHI and HAL are also trading at P/Es below historical averages. Much lower. Advantage: virtual tie between BHI and HAL.

Companies under analysis

Dupont

Growth rate

Market multiple

Direct free cash ow

Residual income

Conclusion

Discounted FCF results

Discounted cash ow analysis is not recommended due to uniqueness and capital intensity of the oil eld services industry. [Insert citation] I include it only for the sake of completeness. SLBs free cash ow has been declining over the past few years. Advantage: cant say.

Companies under analysis

Dupont

Growth rate

Market multiple

Direct free cash ow

Residual income

Conclusion

Residual income model results

In contrast to discounted cash ow models, residual income models place more weight on known values today (specically book value of equity). The value of common stock is the current book value of equity plus all future additions to equity (residual income). Like free cash ow, SLBs residual income has been on the decline. The resulting intrinsic value per share for SLB (52) is below the current market price of 74. For HAL, the intrinsic value is 53 compared to market price of 33. Advantage: HAL.

Companies under analysis

Dupont

Growth rate

Market multiple

Direct free cash ow

Residual income

Conclusion

And the winner is...

Three stocks in the Oils / Energy Sector, Oil Field Services Industry were analyzed. These were the only three that passed the J.O. screen for the sector and industry. Of the three, HAL has better ROA, ROE, asset management, and growth potential. Conclusion: do not buy SLB. Lets look at HALs DuPont analysis, growth rate analysis, FCF, and residual income over the last few years. Presuming everything is on the up and up (pun intended) buy HAL. Dont forget to factor in potential losses from $42B lawsuit that HAL is facing.