Schlumberger's Stock Not Done Climbing

TheStreet.com

NEW YORK (TheStreet) -- The last time we talked about oil services giant Schlumberger , I told you that the stock was heading to $90. This was back in August when shares traded at around $81. My justification the price target then was as follows:

"To reach $90, the company only needs to trade at 10 times forward EBITDA, (earnings before interest, tax, depreciation and amortization). With the stock now trading at just 8-times 2014 EBITDA projections, the next couple of quarters should yield better results, which should raise these estimates higher. In the meantime, the stock seems cheap when considering that the company has not only a strong share buyback program, but also a solid dividend policy."

Since that article, not only has the stock gained more than 11%, Schlumberger has also surpassed my original target with shares closing at $92.18 on Wednesday. With the company due to report third-quarter earnings on Friday, ordinarily, this would have been a clear signal to take profits. But even though this sector is known for its volatility, I wouldn't be in such a rush to dump the stock just yet.

While this industry has been sluggish and hurt by weak prices and soft rig counts, Schlumberger, which is the leader by a meaningful margin, continues to do a good job overcoming (among other concerns) weakness in North America. In that regard, I believe this stock is not only cheap when compared to rivals like Halliburton and Baker Hughes , but with the entire sector looking as if it has bottomed, anyone selling this stock at this point would be leaving (at least) 10% of unrealized gains on the table.

On Friday the Street will be looking for Schlumberger to post earnings of $1.24 per share on revenue of $11.58 billion. Essentially, earnings and revenue are expected to rise 15% and 9%, respectively. These results, if the company does reach them, are expected to be significant improvements above the July quarter when both net income and revenue grew at 9% and 7%, respectively.

These estimates support why I believe the overall sector not only has bottomed, but that better days are already here, not just "ahead." And the fact that Schlumberger dominated the sector in the July quarter -- outperforming both Halliburton and Baker Hughes, which posted revenue growth of 1% and 3%, respectively, kills the notion that Schlumberger was beginning to lose its lead.

However, and perhaps the most important aspect of Schlumberger's upcoming results will be the company continues to progress in international markets. I say this because, although there are meaningful signs of improvement in the company's North American business, Schlumberger is still struggling to grow that region, including posting flat year-over-year results in the July quarter.

To that end, it's been the international markets, areas like Africa, Mideast/Asia and Russia that's been carrying all of the weight -- growing in the July quarter by 10% year over year. It will also be encouraging if management can continue to maintain what has been a strong operational balance among Schlumberger's business segments.

For instance, in the July quarter the company posted 5% growth in production, while drilling and reservoirs characterization posted gains of 7% and 9%, respectively. I believe the segmental performance, which revealed a well-diversified operation is one of the many reasons this stock has done so well. And I haven't even discussed Schlumberger's margins, which is the best in the sector.

I can't say there is a weak link in any part of this business. I believe all of the evidence points to the fact that the struggles that management has had to deal with in the early part of the year, are now in the rearview mirror. And given that the stock is at its 52-week high, the Street already assumes this to be true.

Even so, on the basis of Schlumberger's strong management team, I can see this stock reaching $95 to $100 per share in the next 6 to 12 months. While that may not be the most impressive gain, the company is still in the midst of strong buyback program, while also paying one of the best yields in the sector.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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