HAL - Halliburton Combines Interesting Valuations And Potential Technical Upside (Technical Analysis)

2023-07-12 17:46:45 ET

Summary

• Halliburton Company is identified as a potentially undervalued stock with a high potential for mid-term and long-term uptrend, according to a regression model analysis.
• High chart timeframes indicate the turnaround is already underway but still with a decent upside.
• However, the momentum may require time to develop a stronger confirmation, suggesting possible indecision in the coming weeks before a potential uptrend.

Investment Thesis

I have identified Halliburton Company ( HAL ) as a technically attractive stock that might be on the cusp of the mid-term and long-term uptrend if an investor is willing to wait out possible indecision in the next weeks. Based on multiples resulting from a regression model, the stock seems to be undervalued as well, presenting an upside. The result is a Buy recommendation based on what I see as a high potential of both upsides aligning in the coming months.

Predicting Multiples from Regression Models

The analysis uses the January 2023 regression models provided by Professor Aswath Damodaran on his site. The models are calculated each January for the key global markets, with the US market as a separate one.

According to this approach, a company's current trading multiples are compared to the same company’s predicted multiples based on regressions calculated from the state of the whole market in which it operates. Therefore, we are not seeking to draw conclusions from comparing the current trading multiples between a company in question and its sector peers or other companies with similar risk, growth, and cash flow (which is professor Aswath Damodaran’s definition of the “comparable” firms). Instead, we are looking for the relative difference in the form of the ratio between the current value and predicted value (i.e. difference of current minus predicted, divided by predicted). As a result, a company that trades currently in the market at a multiple lower (higher) than the one predicted from the market regressions based on the aggregate market data of all the companies in this market, is undervalued (overvalued). If we compare two companies and more, the one which has the biggest negative ratio is the most undervalued, while the one that has the biggest positive ratio is the most overvalued by the market. If you want to read more about this approach, check my article on Adobe , where I present in more detail the regression equations and explain how I use them.

The multiples I will analyze here are for Price-Earnings to Growth ((PEG)), Price to Book Value (PBV), Enterprise Value to Invested Capital (EV/IC), Enterprise Value to Sales (EV/Sales), and Price to Earnings (P/E). In the tables below they are presented in the descending order of a statistical value of R-squared, that is to say, by their explanatory power. I am skipping and EV to EBITDA due to its insignificant R-squared.

Is Halliburton Relatively Under- or Overvalued?

To perform this analysis, I collected the inputs for the fundamental values of Halliburton. Find them in the tables below. A modification I made is using an analysts 'consensus growth rate prediction of EPS for the next 5 years in place of the prediction of Sales growth due to the uncertain availability of information for the latter. This replacement is allowed in Damodaran’s model so I am using the EPS forward growth rate prediction numbers taken from the same source (Finviz) for consistency for Halliburton and for all companies in the future articles. I noticed quite a high similarity of the fundamental values between Halliburton and Schlumberger ( SLB ) which will result in predicted multiples close to each other between both stocks. You can read about SLB in my recent article from a couple of days ago.

If we apply these financial data to the regression equations provided by Damodaran, we receive the predicted values of the multiples. See the results below.

We can compare now the predicted values of multiples to the values that are actual and based on stock price and raw financial data as of the day of writing. As I mentioned above, the comparison of the predicted vs actual values indicates the theoretical over- or undervaluation in the context of the aggregate data of all companies in the US market.

Based on the ratios between current valuation multiples and regressions we can appreciate the scale of differences and try to establish a predominant inefficiency of the market. If we follow the theory of regressions, we can say that Halliburton trades currently at a 1.02 PEG which could be considered as “fair” according to the popular interpretation of this multiple. However, in comparison to the regression-based PEG, it seems that Halliburton is implicitly undervalued, missing over 85% of the predicted PEG value 7.1. This scale of undervaluation is predominantly driven by the expected very high (Finviz indicates analyst consensus of 33.1% ) EPS growth in the next 5 years. Its current P/E is missing by a difference that consists a half of its “fair” P/E, while the EV/Sales is even more undervalued - missing a chunk of nearly 53% of its “fair” EV/Sales. On the topic of multiples based on balance sheet data, that is to say, PBV, Halliburton is slightly overvalued by nearly 12%. Overall, the comparison of the values predicted by the regression and the current multiples indicates that Halliburton is undervalued by today’s market and the stock should trade at higher multiples.

The current value of EV/IC is not readily available in public and free sources, so I only calculate it on the basis of the regression equation for the reason of its highest statistical explanatory value (from all the equations presented by Damodaran). It may be used by the reader to compare separately the companies analyzed in my individual articles amongst themselves, e.g. with the relation to Schlumberger.

Technical Analysis

I will analyze Halliburton from a perspective of a number of technical analysis tools and show the screenshots on the monthly and weekly Heikin Ashi candles charts - each timeframe presented through two separate sets of indicators which I bundled in views called Chart 1 and Chart 2. Those two timeframes will be complemented with a simplified daily Renko chart to reflect the price momentum. The details of my methodology can be found in my previous articles as those on Salesforce or Adobe .

• The Long-Term Trend

For long-term trend analysis, I use monthly charts. In Chart 1 setup, Halliburton stock has started July with a strong green Heikin Ashi candle, following the June bounce back. Ichimoku Cloud has formed a decent green area and its upper edge is rising, which will most probably increase the next S/R levels. At this timeframe, I have identified the nearest S/R zones around prices $31 and $40, which I marked with thick purple horizontal lines. As for other technical indicators, Alligator’s lines are in a positive setup (Lips over Teeth and Teeth over Jaw), and all three lines point upwards. We also see a steady rise in the On Balance Volume (OBV) line. Only the Awesome Oscillator (AO) is in a slightly divergent mood, since the recent bars are in red, giving signs of bearish divergence. The bottom pane is indicating Revenues.

In Chart 2 setup, the 10-month Moving Average is well above the 50-month MA and both are trending upwards. The Composite Index Divergence Indicator (CIDI) is on the verge of crossing above the fast (green) moving average. Both are still below the slow average, so the most bullish sign would be when they cross above the latter. Moving Average Convergence Divergence (MACD) seems to be approaching its signal from below and both are in the positive territory. Combined with the Positive Direction Indicator (DI+) line bouncing off the Negative Direction Indicator (DI-), we can see positive indications of an approaching uptrend.

Surpassing a strong S/R level should be considered as a departure from a long-developing basis, once it happens. As in the case of Schlumberger, I see the upcoming months as the period of accumulation.

• The Mid-Term Trend

For the mid-term trend analysis, I use weekly charts. In Chart 1, I have pulled up the lower S/R line to reflect the long lower edge of the recent Ichimoku cloud, turning green. Alligator’s lines are in the situation of positive crossings: the green line of Lips is crossing over the red line of Teeth and the Teeth line is crossing above the Jaw). AO is still to cross above the zero level, though. This crossing will be marked on a higher level than the last one from November 2022, as we see higher lows in the chart. The OBV line is also rising and reaches already the high from January which was achieved at a higher price point.

In Chart 2, the 10-week MA is still yet to cross above the 50-week MA, pulled by the current week's candle which started above the 50-week MA. CIDI has taken a sharp slope above both the fast and the slow average, while the fast average is crossing from below the slow one. The sharp slope of CIDI may mean that it will be topping in the coming 2-3 weeks for a short-term correction. MACD and its signal are below the zero level but there is a crossing of MACD above the signal taking place. We can also see that the DI+ line has crossed above the DI-, confirming a possible return to a mid-term uptrend.

The indicators on both charts in weekly timeframe are in positive positions but a critical look at them makes me think that they all need some time to develop a stronger confirmation.

• The Price Momentum

On the daily Renko chart, Halliburton’s stock is in a positive momentum since May. However, we see that the blue 10-box MA is still to cross the red 50-box MA line. We can see a positive sign in the MACD crossing above the zero level. The last time this happened was in October 2022, similar to the momentum of Schlumberger. The stock has a strong S/R line to break through.

Conclusions

Overall, the regression-based valuation of Halliburton indicates a potential for an upside. Also, the overall mood of technical indicators is rather positive. However, I can see (again) a slight indecision in the way momentum develops. On much higher timeframes it might be necessary for the price to build a strong base around $40-$42 after a period of rest, accumulation, or a temporary correction to levels of $35, in order to possibly drive to the next target around $50.

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