Digital Leadership And Global Expansion Will Strengthen Margins And Future Earnings

Key Takeaways

• Digital leadership and cost optimization are enhancing margins and supporting earnings growth, alongside substantial potential shareholder returns through dividends and buybacks.
  
• Expansion in key regions bolsters future revenue, while asset sales reduce earnings volatility and positively impact cash flow and earnings.
  
• Geopolitical tensions and economic growth fluctuations create uncertainty, potentially impacting revenue due to cautious customer spending and competitive pressures on margins.

Catalysts

Engages in the provision of technology for the energy industry worldwide.

• SLB is leveraging its digital leadership to accelerate customer adoption, providing high-margin growth opportunities and potentially boosting earnings.
  
• Expansion in markets such as the Middle East, Asia, and offshore projects, regardless of short-cycle decline, is expected to support future revenue growth.
  
• The sale of the Palliser asset will reduce capital intensity, decrease earnings volatility associated with commodity prices, and improve cash flow, which can positively impact earnings.
  
• SLB's cost optimization and operating efficiency measures are driving margin expansion, enhancing net margins and supporting earnings growth.
  
• Anticipated shareholder returns, alongside substantial cash flow generation, signal strong cash deployment strategies likely improving earnings per share (EPS) through dividends and buybacks.

Schlumberger Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Schlumberger's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.4% today to 13.4% in 3 years time.
• Analysts expect earnings to reach $5.3 billion (and earnings per share of $3.38) by about December 2027, up from $4.5 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $6.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2027 earnings, up from 12.3x today. This future PE is greater than the current PE for the US Energy Services industry at 15.6x.
• Analysts expect the number of shares outstanding to grow by 3.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

Schlumberger Future Earnings Per Share Growth

Risks

• Commodity prices are under pressure due to concerns about an oversupplied market and weaker demand from China. This could result in cautious spending by customers, impacting revenue and earnings growth.
  
• North American activity, particularly in U.S. land markets, remains constrained by gas prices and ongoing capital discipline by operators, potentially affecting revenue from these regions.
  
• SLB's operations could face price competition pressures, which might affect margins if performance and technology fail to convincingly deliver cost efficiency or unique value.
  
• The acquisition of ChampionX and integration activities introduce merger and execution risks that could potentially strain financial resources or distract from core market activities, impacting net margins.
  
• The current macro environment uncertainty, particularly factors like geopolitical tensions and economic growth fluctuations in key regions, may lead to unpredictable capital spending patterns by customers, affecting revenue and earnings stability.

Valuation

• The analysts have a consensus price target of $56.89 for Schlumberger based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $49.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $39.8 billion, earnings will come to $5.3 billion, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 8.3%.
• Given the current share price of $38.93, the analyst's price target of $56.89 is 31.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.