Earn Extraordinary Profits in the New Middle-East: Baker Hughes Incorporated (BHI), Schlumberger Limited. (SLB), Halliburton Company (HAL)

Is C&J undervalued or are competitors overvalued?

When valuing businesses, I like to see a price to cash flow below 10 and a current P/E that is less than or equal to the 5-year projected earnings growth rate (PEG) and, preferably below the industry PEG. The less debt a business has the better, and I also believe it is easier for a small business to grow at a faster proportional rate than a larger one. So if it has a relatively small market cap in comparison to competitors, I tend to view that as a positive.

When looking at the competition, the numbers indicate to me that these are all very fairly valued businesses with the potential to reward investors with 12 to 15% annualized returns over the next five years. However, C&J is currently valued at a level that would allow the share price to increase between 50% and 100% just to reach a similar valuation to the other businesses listed. It appears to me that the comparison group of businesses I selected is properly valued and C&J is undervalued. The share price could return to its all-time high and the business would still not be expensive.

Extraordinary potential returns

Based upon my analysis, I think you can buy any of these businesses and achieve market beating annualized returns over the next five years. However, at around $22.73/share today, I think you can purchase C&J with the added prospect of exceptional returns if the valuation rises to equal that of similar businesses. Also, the small size, growth and profitability of C&J could very well make it an attractive target for acquisition and reward existing shareholders with a significant payday much sooner. If you want good profits, buy the large service providers listed, if you want great profits, buy C&J Energy Services.

The article Earn Extraordinary Profits in the New Middle-East originally appeared on Fool.com and is written by Ken McGaha.

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