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Companies under analysis

Dupont

Growth rate

Market multiple

Direct free cash flow

Residual income

Conclusion

The Mosaic of Stock Analysis
Part 3: Competitive analysis using financial ratios
...with a hint of DCF analysis

David J. Moore, Ph.D.
www.efficientminds.com

February 11, 2013

.O. BHI. and HAL are the only three companies in the Oil / Energy Sector and Oil Field Services industry that pass the J. Cornerstone Value I screen. screen (see JO_screen tab in spreadsheet): Baker Hughes (BHI) Halliburton (HAL) SLB.O.Companies under analysis Dupont Growth rate Market multiple Direct free cash flow Residual income Conclusion Proposed company and alternates Proposed company: Schlumberger (SLB) Alternates identified by J.

Companies under analysis Dupont Growth rate Market multiple Direct free cash flow Residual income Conclusion DuPont cross-sectional and time-series analysis Operational efficiency SLB’s PM is higher than both BHI and HAL but is on the decline. In other words. . Advantage: HAL. SLB and HAL are comparable Overall HAL’s ROE advantage is due primarily to superior total asset turnover (TATR). Asset management SLB’s asset management is improving but still lags both HAL and BHI HAL has the best asset turnover ratio Leverage . HAL is doing the best job at generating sales per dollar of assets. HAL’s PM is on the rise as is BHI.BHI has the lowest leverage.

2% is above our presumed long-run growth rate of 62/3%.9%) in ROA but is ahead of BHI (6. .ability to grow with external funds without altering debt ratio SLB (13.Companies under analysis Dupont Growth rate Market multiple Direct free cash flow Residual income Conclusion Growth rate comparisons Internal growth rate . Sustainable growth rate . our presumed long-run growth rate of 62/3% is a safe bet for SLB and HAL but not so much with BHI. Therefore.3% internal growth rate.2%) is lagging behind HAL (11. Fortunately. We can not say this for BHI’s 6. 7.3%) is higher than BHI (10.4%) Advantage: HAL.3%).2%) but lower than HAL (23.ability to grow without external financing SLB (7.

Advantage: virtual tie between BHI and HAL. However.Companies under analysis Dupont Growth rate Market multiple Direct free cash flow Residual income Conclusion Market multiple results SLB is trading at a P/E of 18. BHI and HAL are also trading at P/Es below historical averages. . Much lower. below its historical average of 21.

. [Insert citation] I include it only for the sake of completeness. SLB’s free cash flow has been declining over the past few years.Companies under analysis Dupont Growth rate Market multiple Direct free cash flow Residual income Conclusion Discounted FCF results Discounted cash flow analysis is not recommended due to uniqueness and capital intensity of the oil field services industry. Advantage: can’t say.

. The resulting intrinsic value per share for SLB (52) is below the current market price of 74. residual income models place more weight on known values today (specifically book value of equity). Advantage: HAL. the intrinsic value is 53 compared to market price of 33.Companies under analysis Dupont Growth rate Market multiple Direct free cash flow Residual income Conclusion Residual income model results In contrast to discounted cash flow models. Like free cash flow. The value of common stock is the current book value of equity plus all future additions to equity (residual income). SLB’s residual income has been on the decline. For HAL.

Companies under analysis Dupont Growth rate Market multiple Direct free cash flow Residual income Conclusion And the winner is. Of the three. . HAL has better ROA. FCF. ROE. screen for the sector and industry. Oil Field Services Industry were analyzed. Conclusion: do not buy SLB. These were the only three that passed the J. asset management. Presuming everything is on the up and up (pun intended) buy HAL. Don’t forget to factor in potential losses from $42B lawsuit that HAL is facing.O. growth rate analysis. Three stocks in the Oils / Energy Sector... Let’s look at HAL’s DuPont analysis. and residual income over the last few years. and growth potential.