What’s in a Name? Profits

09/18/2007 12:00 am EST


John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer, editor of John Dessauer’s Investor’s World, says much-maligned Halliburton should rebound nicely as the economy and energy prices stay strong.

When investors ignore half the news, you can be sure the stock market is heading in the wrong direction. This was true in 2000 when tech-stock investors ignored all the bad news. Now investors are ignoring all the good news.

And there is plenty of good news. For example, the US trade deficit was smaller than first reported in May and shrank again in June. There is solid growth in the global economy. The federal budget deficit continues to shrink, thanks to record tax collections. The White House says this year’s deficit will be $205 billion for the full fiscal year, a relatively low 1.5% of [gross domestic product].

And there is good news on inflation, too. The Consumer Price Index rose only 0.1% in July and is up just 2.4% over the last 12 months. Higher energy and food costs are not causing a broad rise in inflation.

All this good news leads me to [believe] stocks are headed higher. Stay fully invested.

Halliburton (NYSE: HAL) is my new pick, for several reasons:

1. The price is right. Earnings expectations for this year are $2.55, rising strongly to $2.90 to $3.20 in 2008. The stock is trading at a P/E of 14x this year’s expectations and 12x 2008 midpoint expectations. That is a discount to its peers and low based on its historical average P/E.

2. There is a huge stock-buyback program. Early this year Halliburton spun out Kellogg, Brown & Root (KBR), its engineering business. The proceeds are being used to buy back shares—27.7 million in the second quarter alone. The entire buyback authorization is $5 billion, with $2.8 billion still remaining.

3. The strategic decision to move corporate headquarters to Dubai is brilliant. Halliburton already has significant business in North America and the Eastern hemisphere. The move to Dubai signals Halliburton’s intention of finding more Middle East growth opportunities.

4. The stock gets little respect on Wall Street because of KBR’s history in Iraq and low natural gas prices, which hamper activity in that market. KBR is now gone, so Halliburton is a pure energy services play. Iraq memories will fade. Natural gas prices can be volatile, but growing energy demand means they won’t collapse.

5. Halliburton recently acquired PSL Energy Services, [whose] production-enhancement services are in strong demand because owners of existing oil and gas fields want to get the most out of their investment. This tells me that Halliburton is willing to use its financial strength to make profitable niche acquisitions.

I expect the environment to stay favorable even if oil falls back to OPEC’s $60 to $65 fair value estimate.

In fact, a fall below that level would just temporarily slow down the activity for energy services. My 12-month target is $48. (The stock closed Monday below $37—Editor.)

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