Drilling activities in the oil and gas industry continue to move along a downtrend. Even after a small recovery during last week, the long-term trend is a smooth decline since 2011. Nonetheless, exploration activities have not eased at any one geography. And after exploration comes production, but first the well has to be drilled. Hence, drilling companies still experience a high demand for its services. Nabors Industries (NBR) is the largest drilling company, and specializes in onshore drilling. During the last week, the Peter Lynch earnings indicator continues to indicate the stock as a strong upcoming performer. Jim Cramer, host of Mad Money and former hedge fund manager, has also highlighted the stock's future prospects. So, is this a good time for prospective investors with a long-term outlook to enter the business with a large holding?
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Chosen for Long-Term Investment
Richard Snow (Trades, Portfolio) purchased his first shares of Nabors Industries during the first half of 2013, and ever since has increased his holding until becoming the largest guru investing in the company. Until the entrance of Mr. Snow, Donald Smith (Trades, Portfolio) was the guru with the largest position, started during the second half of 2012. Louis Moore Bacon (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) are two more gurus who chose the stock as a new depositary of their investment during 2013. Hence, the company simultaneously caught the attention of several gurus looking for a long-term investment. That does not establish a difference with the repetitive purchases and sales done by Renaissance Technologies.
The long-term prospects for Nabors Industries reflect on Mr. Cramer's public declarations. "As a driller, Nabors is a cyclical company whose stock should thrive if the economy makes sharp improvements," Mr. Cramer said. Financial institutions have also noticed the uptrend performance of the company and its future prospects for growth. Then, it should come as no surprise that six institutions updated the stock's rating to "Neutral" or "Buy" during the last two months. Most telling have been target price boosts already over $25, up from the high-teens registered at the end of 2013.
Moreover, Peter Lynch recommends to buy a stock when the stock price is above earnings. Taking that guideline, this is the time to purchase the stock, and the window of opportunity is closing. Whether the returns will be at the least the same as those received by the gurus, it is not certain. In this vein, what can be assured is that gurus did purchase the stock during the last period when earnings fell below price.
Solid Business with Telling Prospects
Even when voices are unanimous around a stock, there remains a chance that they all may be wrong, or ignoring some facts. For example, Nabors Industries' performance has a weak pressure pumping business with the power to negatively affect short-term prospects. The business is also exposed to the gas price fluctuations, and an imbalance in the demand-supply of rigs in the U.S. land drilling market presents considerable risk. Most important, the firm possesses a relatively weak balance sheet in a severe credit-constrained environment.
So, in a sense, analysts, gurus and Cramer itself are bidding on an exposed business model. What makes them bid on Nabors Industries you may ask? Besides being the leading North American land drilling contractor and having a large, high-quality fleet of drilling and workover rigs, Nabors Industries has grown through cash flow reinvestments and acquisitions. Most importantly, the firm is well positioned with a sound mix of high performance rigs and new rigs working in the key shale plays.
Last, Nabors Industries has started a share creating value policy through which shareholders began to receive rewards. Nonetheless, the stock currently trades at 46.3 times its trailing earnings, carrying a 230% premium to the industry average. Hence, prospect investors are recommended to keep an eye on the stock as face value entered a declining trend and soon may offer a better entry point.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
This article first appeared on GuruFocus.