Energy, industry, and government contracting behemoth Halliburton (NYSE:HAL) reports Q1 2006 earnings results tomorrow morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.
What analysts say:
- Buy, sell, or waffle? Nineteen analysts follow Halliburton, and as much as the liberal left hates the company, the mostly conservative business community appears to love it. The company garners 17 buy ratings and only two holds.
- Revenues. Wall Street will be looking for a 14% rise in revenues tomorrow, to $5.6 billion.
- Earnings. Profits are expected to surge 50% to $0.87 per share.
What management says:
Halliburton's biggest news, of course, is the impending flotation of its KBR subsidiary in an IPO. Details have not been quick in coming, but what we do know is that KBR isn't much of a cash cow for Halliburton. The $210 million it earned in 2005 represents just a 2.1% profit margin on the subsidiary's $10.1 billion in sales.
What management does:
It probably comes as news to those who accuse it of profiteering, but Halliburton actually operates on razor-thin margins -- it's kind of the Wal-Mart of the government-contracting world. The good news for investors is that when Halliburton is able to make any improvement whatsoever in terms of margins, the results show up quickly on the bottom line. The results, as shown in the margins table below, help to explain how a modest 14% rise in sales can result in profits increasing by 50%, as they're expected to do tomorrow. Almost every one of the 820 basis points added to gross margins over the past 18 months have converted into operating profits.
|
Margins % |
9/04 |
12/04 |
3/05 |
6/05 |
9/05 |
12/05 |
|---|---|---|---|---|---|---|
|
Gross |
5.4 |
5.7 |
7.3 |
10.4 |
11.9 |
13.6 |
|
Op. |
3.6 |
4 |
5.7 |
8.8 |
10.1 |
11.7 |
|
Net |
(8.3) |
(4.8) |
(2.8) |
2.5 |
5.2 |
11.2 |
One Fool says
I have to admit that I'm more than a little suspicious of the sustainability of these margins. Why? Simply because Halliburton hasn't grossed, or netted, anywhere near these margins at any other time over the past 16 years (as far back as our data provider goes.) The closest Halliburton has gotten to its current trailing gross margin of 13.6% was 1997, when the company grossed 11.9%. And its previous best net margin record was set in 2001, when the company netted barely half its current 11.2% take. And the fact that Halliburton owes a good portion of its recent wealth to a $376 million tax credit it received last quarter doesn't make me any more sanguine about the long-term sustainability of these margins.
Competitors:
- Willbros (NYSE:WG)
- URS (NYSE:URS)
- Schlumberger (NYSE:SLB)
- Globalsantafe (NYSE:GSF)
- Foster Wheeler (NASDAQ:FWLT)
- Baker Hughes (NYSE:BHI)
Fool contributor Rich Smith does not own shares of any company named above.
