Stock of the Week

Schlumberger

Schlumberger
NYSE Symbol: SLB
Industry: Oil service
Price as of 9/17: $38.17

Energy is once again the worst performing sector year to date. The last five years have not been kind to the energy sector. Increase supply out of the US, and other parts of the world, combined with fears of slowing global growth has keep the price of oil and oil stock valuations low. Saudi Arabia and OPEC continue to control and support the price of oil from declining further. Even at current levels, oil companies are getting more efficient by lowering costs and improving profits and cash flow. Numerous oil companies are struggling to grow sales, but cash flow is improving creating cheap valuations with hefty dividend yields including this week's featured stock, Schlumberger.

Schlumberger's stock has seen better days falling from $80 a share to below $40 a share in the last two years. At a conference last week, Schlumberger management announced they expect to return to peak international margins achieved in their prior cycle (absent a recession). Schlumberger is vowing to exit unprofitable businesses, restructure some units and focus on returns and look to restore double-digit margins in North America, which are currently in mid-single-digits. The cost cuts and better efficiencies are expected to achieve double-digit free cash flow margins. With these moves, management reiterated they are commitment to maintaining the dividend. The current dividend yield is 5.2%.

Following the conference, an analyst at Morgan Stanley upgraded the stock with a $51 price target or more than 40% above current levels. Besides the cost cut moves to boost cash flow, the analyst likes Schlumberger's heavily weighted International business. Many US oil companies are struggling to grow sales without looking to expand overseas.

Schlumberger is not without its risks. Schlumberger has a high debt load of $17 billion. Fuller weakness on the price of oil could put pressure on the company to pay down their debt while still shelling out billions of dollars for the dividend. Currently the stock trades for 20 times earnings. If Management can boost cash flow and margins, earnings should improve, providing a better valuation. In the meantime, shareholders get to collect the annual 5.2% dividend.