Is Trending Stock Schlumberger Limited (SLB) a Buy Now? - Aug 22, 2024

Schlumberger (SLB – Free Report) was recently included in the Zacks.com Most Wanted Stocks list. Therefore, you may want to consider some of the key factors that could influence the stock’s performance in the near future.

Over the past month, shares of the world’s largest oilfield services company have returned -8%, compared to a change of +2.2% for the Zacks S&P 500 Composite Index. Over that time, the Zacks Oil and Gas – Field Services sector, which Schlumberger is a component of, has lost 9.2%. The key question now is: where could the stock go from here?

Although media reports or rumors about a significant change in a company’s business outlook usually cause its stock to trend and lead to an immediate price change, there are still some fundamental factors that ultimately determine the buy and hold decision.

Earnings Estimates Revised

Rather than focusing on anything else, at Zacks we focus on evaluating the trend in a company’s earnings forecast. That’s because we believe the fair value of its stock is determined by the present value of its future earnings streams.

We essentially look at how sell-side analysts covering the stock revise their earnings estimates to reflect the impact of recent business trends. And if earnings estimates rise for a company, the fair value of its stock rises. A fair value that is higher than the current market price increases investor interest in buying the stock, which leads to a rise in its price. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

For the current quarter, Schlumberger is expected to post earnings of $0.89 per share, which represents a change of +14.1% from the year-ago quarter. The Zacks Consensus Estimate has changed by -0.1% in the past 30 days.

The consensus earnings estimate of $3.49 for the current fiscal year indicates a year-over-year change of +17.1%. This estimate has changed by +0.1% in the last 30 days.

For the next fiscal year, the consensus earnings estimate of $4.10 indicates a change of +17.5% from what Schlumberger was expected to report a year ago. Over the past month, the estimate has changed by +1%.

With an impressive outside-audited track record, our proprietary stock rating tool, the Zacks Rank, is a more conclusive indicator of a stock’s near-term price performance because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent change in the consensus estimate, along with three other factors related to earnings estimates, have resulted in a Zacks Rank #3 (Hold) for Schlumberger.

The chart below shows the evolution of the company’s 12-month consensus EPS estimate:

EPS over 12 months

Projected revenue growth

While earnings growth is arguably the best indicator of a company’s financial health, nothing as such happens if a company is unable to grow its revenue. After all, it is nearly impossible for a company to grow its profits over a sustained period of time without growing its revenue. Therefore, it is important to know a company’s revenue growth potential.

For Schlumberger, the consensus estimate for sales for the current quarter of $9.3 billion indicates a change of +11.9% from the prior year. For the current and next fiscal years, the estimates of $36.87 billion and $42.94 billion indicate changes of +11.3% and +16.4%, respectively.

Latest reported results and surprise history

Schlumberger reported revenue of $9.14 billion in the latest quarter, representing a year-over-year change of +12.8%. EPS of $0.85 for the same period compares to $0.72 a year ago.

Compared to the Zacks Consensus Estimate of $9.07 billion, reported revenues represented a surprise of +0.82%. EPS surprise came in at +2.41%.

The company has topped consensus EPS estimates in each of the last four quarters. The company has topped consensus revenue estimates three times during that period.

Assessment

No investment decision can be effective without considering the valuation of a stock. Whether the current price of a stock accurately reflects the intrinsic value of the underlying business and the company’s growth prospects is a key factor in determining its future performance.

While comparing the current values of a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company to its peers on these metrics gives a good idea of whether the stock price is reasonable.

The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to grade stocks from A to F (an A is better than a B; a B is better than a C; and so on), is very useful in identifying whether a stock is overvalued, fairly valued, or temporarily undervalued.

Schlumberger is rated B on this front, indicating that the company is trading at a discount to its peers. Click here to see the values of some of the valuation metrics that led to this rating.

Conclusion

The facts discussed here and many other information on Zacks.com could help determine whether or not it is worth paying attention to the market buzz about Schlumberger. However, its Zacks Rank #3 suggests that the company could perform like the broader market in the near term.