JP Morgan analyst Michael LaMotte is raising his estimates and price target on Schlumberger (SLB), citing a revenue reacceleration and improving margins as a result of a favourable shift in mix. La Motte sees revenue rebounding in 2H08:
2Q08 should end up marking an important inflection point with respect to the market’s confidence in SLB’s rev growth and margins. Mgmt spelled out some important factors on the rev side (including increased capex, guidance of 2H08 seismic rev growth “comfortably” ahead of 2H07— implying 2H/1H growth of +/-30%—and at least 20% int’l rev growth in 09) as well as reasons why margins can continue to improve. (e.g., better utilization, better mix, and more offshore). Both the rev and margin discussion point to a material lift in consensus est that—given persistent resistance to the notion that the biggest company in the space can also be the fastest growing—is likely to come gradually over the next few Qs.
LaMotte upped his price target to $150, implying that SLB will deliver 50% upside in the next year. He defends his position by saying that demand for SLB’s services will rise as oil company’s struggle to fight declining output in mature fields:
In today’s market, we confess that the suggestion of a stock having almost 50% upside may sound like a stretch—until one looks at the EPS visibility. (Mgmt referenced the increased services intensity of combating depletion in mature fields, the 2Q08 surge in deepwater newbuild announcements, and the surge in int’l natural gas activity as reasons for their long-term bullishness). As we mentioned in our report last week, SLB’s high margins suggests another doubling of EPS within 4 years using mgmt’s guidance of high-teens rev growth.
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