Schlumberger Limited (NYSE:SLB) stock has remained sideways over the past few quarters amidst volatility. However, in the past four weeks, the SLB stock sharply declined by 16.5%. It’s not difficult to guess the reason. The coronavirus outbreak will have a negative impact on Chinese and global GDP growth.
Citigroup economists expect China’s full year GDP growth to decline to 5.5% from a previously forecasted growth of 5.80%. In the coming days, it’s likely that economists will talk about the extent of global slowdown. With Schlumberger’s business sensitive to economic fluctuations, SLB stock downside was expected.
SLB Stock Correction is an Opportunity
From a technical perspective, SLB stock has seen support around $32 to $35 range in the last few quarters. With the stock trading within that range, I believe that investors can consider accumulating SLB stock.
However, this is not the only reason to consider SLB stock attractive. For 2020, analyst estimates peg earnings per share at $1.57. Considering the current stock price of $34, SLB stock is trading at 21.7 times 2020 earnings. With the S&P 500 trading at a price-to-earnings ratio of 24.8, I believe that Schlumberger is trading at attractive valuations.
Investors will point out that the company’s earnings growth is likely to remain muted and the stock might be fairly valued. However, it is worth noting that Schlumberger currently pays an annual dividend of $2 per share. At current prices, that translates to an attractive dividend yield of 5.88%, which is sustainable in 2020 and beyond. This makes SLB stock worth considering for a dividend portfolio.
Talking about dividend sustainability, it is worth mentioning that for 2019, Schlumberger reported operating cash flow of $5.4 billion. With free cash flow of $3.7 billion, there is ample headroom for dividends and deleveraging. Even if OCF declines in 2020, Schlumberger will continue to pay dividend and maintain a healthy credit profile.
Since I mentioned the credit profile, it is worth adding here that asset sales in 2020 could boost cash position and help in deleveraging. Schlumberger, Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BKR) are all looking at asset sale for business re-organization amidst industry challenges. Recently, Equinor (NYSE:EQNR) and Royal Dutch Shell (NYSE:RDA.A) acquired 49% interest in Argentina’s onshore Bandurria Sur block from Schlumberger for $355 million.
Well Diversified Globally
Coming to the core business fundamentals, I believe that Schlumberger benefits from global revenue diversification.
As an example, the company reported flat year-on-year revenue in FY19 as compared to FY18. The company’s North America revenue declined by 10%, but this decline was offset by international revenue growth of 7%. For the full year, the company derived 72% revenue from international markets.
In particular, revenue growth of 11% in Latin America and 7% in Europe/CIS/Africa helped offset the weakness in North America. It is expected that oil & gas sector investments will remain strong in Latin America in 2020. Schlumberger is positioned to benefit and reverse the negative sentiments arising from weak oil & gas spending in the U.S.
While North America revenue will continue to remain sluggish, Schlumberger has a financial target of restoring double digit margins in the region. Currently margins are in mid-single digits. Therefore, cost cutting can help in boosting cash flows even as the top-line trend remains sluggish. The company also expects to improve international margins by 500 basis points as a financial target. However, I don’t see that coming in 2020.
My Concluding Thoughts on SLB Stock
There is no doubt that 2020 will be challenging for Schlumberger with economic concerns. It’s therefore not surprising that SLB stock has declined in the recent past.
However, with healthy and sustainable dividends, SLB stock is worth considering on declines. In addition, valuations are not expensive and international markets will continue to support growth.
As the company pursues asset sale and cost cutting, cash flows are likely to remain strong even if revenue growth is muted.
These factors make me positive on SLB stock and I believe that the stock has limited downside risk, but meaningful upside potential.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
