Over the past 30 days, Schlumberger Limited (SLB)—the world’s largest oilfield service company— has been trading in the range of $70.25 – $77.22, with support around $71 and resistance at $74.60.
The stock is trading above the 50-day moving average and 200-day moving average with the 14-period relative strength index (RSI) at 64%. The price is currently approaching a resistance level at around $77.50 that was tested three times this year.
Bottom line? Our indicators give a bullish view on SLB and make it a strong candidate for a credit put spread options trade.
A LOOK AT FUNDAMENTALS
In addition to its bullish technical indicators, SLB looks bullish from a fundamental perspective.
The company earned $1,256 million, or 94 cents per share, for the quarter that ended March 31, down from $1,282 million, or 97 cents per share, for the same quarter last year. Revenue also increased 7.6 percent, to $10,668 million.
SLB’s head-to-head comparison to its main competitors shows that the company has better gross margin and operating margin, higher net income and EPS, and it is a market leader. SLB’s consensus earnings forecast for the quarter ending June 2013 is of $1.06 to $1.19 per share. GAAP operating margin was 19.0 percent, compared to 19.59 percent in the first quarter of fiscal 2012, and cash flow from operating activities was $1,119 million, compared to $758 million in the first quarter of fiscal 2012.
SLB P/E stands at 18.81. This is modestly above the industry average of 18.00 and the S&P 500 average of 18.41. The company is currently trading above the preferable P/E ratio of 15x, and over the last five years the company’s shares have traded in the range of 16.43x to 19.84x trailing 12-month earnings. SLB’s current price/sales of 2.37 is above the average of its industry, of 1.21.
The stock is currently trading 19.6% below its intrinsic value of $99.91 this suggests that the stock is undervalued at these levels. The beta of 1.81 implies higher volatility of the stock with respect to the S&P 500.
OPTIONS STRATEGY RECOMMENDATION
Investors should consider the following credit put spread:
Buy September 2013 80 puts at $1.40 and sell the September 2013 82.5 puts at $2.30.
The net credit to start is $0.90, and we recommend holding until spread price reaches $0.10. This strategy will allow you to collect time premium for out-of-the-money short puts and decrease the overall cost of the initial investment.
