Halliburton (HAL 1.11%) is a darling of Wall Street. Twenty-six of the 31 analysts currently covering the company rate it a buy or strong buy. Only one analyst thinks the company's stock will underperform. One reason reason Wall Street loves this stock is because it's so cheap. However, that's only part of the story, so let's drill down a bit deeper.
What makes Halliburton a cheap stock?
There are many different ways to value a stock, with a simple price-to-earnings ratio, or P/E, being a common foundation. Halliburton's P/E is 15, making it cheaper than its industry peers, which have an average P/E of 20.
Sources: Flickr user ThinkGeoEnergy.
However, P/E only tells us the stock's valuation for its earnings over the past year. Those earnings could rise or fall in coming years, but we won't know that from this particular ratio.
That's why many investors take the P/E ratio one step further and take a look at the price/earnings-to-growth ratio, or PEG ratio. This simply divides a company's price/earnings ratio by its long-term growth rate. Here we are looking for a PEG ratio of less than 1x, which signifies investors are not overpaying for the company's growth. Halliburton's PEG ratio is 0.59, so it looks quite cheap by this metric, too.
Why does Wall Street love Halliburton's stock?
Analysts expect Halliburton to steadily increase earnings over the next few years, from $3.99 per share this year, to $5.25 per share next year, and $6.21 per share in 2016. That strong growth is fueled by the shale boom in North America, as well as Halliburton's oilfield services offerings around the world.
Halliburton's strong suit is its offerings of products and services to shale producers. It helps producers overcome the challenges of these tight oil and gas plays by targeting wells to the sweet spots of the play, optimizing fracture treatments to get more oil and gas out of the rocks, and handling the process in an environmentally responsible manner. Halliburton is a leader when it comes to shale, and the company continues to roll out new products and services that help producers get more out of each well.
Analysts also love the stock for the company's share repurchase program. The company has an excellent track record of buying back shares when its stock is cheap, which helps increase earnings per share. Earlier this summer, the company reloaded its stock buyback program to a total of $6 billion. That buyback authority will come in handy given the recent sell-off in the company's stock, as it can now buy a much bigger chunk of shares.
As shown in the chart, Halliburton's stock today is as cheap as it was the last time the company bought back a large amount of shares. Analysts know Halliburton will likely repurchase a significant amount of stock in light of the recent sell-off, which is a pretty big catalyst that could move the stock higher once again.
Investor takeaway
In Halliburton we find a reasonably cheap stock that has two big catalysts in the form of earnings growth and a big stock buyback. That is why it's no surprise analysts love this stock.
