Halliburton Underperforms Market on Brutal Day for Investors

Among the Street's worst performers today is Halliburton, an oil & gas equipment & services company whose shares slumped -8.7% to a price of $24.58, which is 42.26% below their average analyst target price of $42.57. The average analyst rating for the stock is buy. HAL underperformed the S&P 500 index by -7.0% as of today's aftermarket session, but outpaced it by 43.8% over the last year with a return of 28.2%.

Halliburton is classified within the energy sector, which encompasses the oil, gas, nuclear, and renewable energy industries. The stock prices of energy companies are highly correlated with geopolitics: economic crisis, war, commodity prices, and politics all have an effect on the industry. For this reason, energy companies tend to have high volatility -- meaning large and frequent price swings.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US energy companies is 9.11, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

Halliburton's trailing 12 month P/E ratio is 15.5, based on its trailing Eps of $1.59. The company has a forward P/E ratio of 8.8 according to its forward Eps of $2.78 -- which is an estimate of what its earnings will look like in the next quarter. The problem with P/E ratios is that they doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.

We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 0.26 Price to Earnings Growth (PEG) ratio. In HAL's case, the elevated P/E ratio is justified by future earnings growth estimates -- assuming those estimates turn out to be close to reality.

Earnings are the most widely used metric for understanding a stock's valuation. When considered alongside the company's revenue growth, they can also give insight into the company's margins, which in turn can allow us to make inferences about its possible competitive advantages. Halliburton's year on year (YOY) quarterly earnings decreased at a rate of -53.0% while its YOY quarterly revenue grew at a rate of 36.9%. Since earnings are growing at a slower rate than revenue, the company's profit margins are shrinking as a result of increases in the their tax liabilities, decreasing product prices, an increase in overhead, or a rise of the cost of goods sold.

In contrast with earnings, gross profits are calculated on the basis of the company's cost of goods sold (i.e. cost of labor and materials only) subtracted from sales revenues. Significant gross profit margins shed light on how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.

In HAL's case, the gross profit margins are 13.8%, which that it is operating in a highly competitive market, where it is unable to raise its prices (and thus increase its margins) without losing customers to its competitors.

Companies have many other costs and sources of income occurring outside of their core business. Everything from equipment depreciation, returns on capital investments, legal costs, income from intellectual property, and interest payments on debt factor into the company's ultimate profitability. We can see the effect of these additional factors in Halliburton's levered free cash flow of $1.429,374,976.

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in HAL have received an annualized dividend yield of 1.2% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Halliburton's P/B ratio is 3.1 -- in other words, the market value of the company exceeds its book value by a factor of more than 3, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 1.45 as of the second quarter of 2022.

Despite today's drop, Haliburton is still likely overvalued because it has an inflated P/E ratio and an elevated P/B ratio. On the other hand, it has solid cash flows and a PEG ratio that indicates that its growth potential has not been priced in. Growth oriented investors may be willing to overlook the company's narrowing margins and lofty valuation. But the question they need to ask themselves is whether there is still more room for this stock to fall in the near term.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.