Halliburton (HAL) Undervalued Growth

My previous post on Halliburton was mainly focused on presenting the company’s growth prospects on the back of the American oil boom. Now there’s even more reason to buy the company besides its relative undervaluation and high growth potential.

Baker Hughes Acquisition

Halliburton recently put out a bid for Baker Hughes for $35 billion. This represented a 56% premium to the price of Baker Hughes before any buyout news had started. Halliburton also attached a breakup fee of $3.5 billion to the deal, forcing them to have to give Baker Hughes 10% of the buyout amount back if the deal for some reason did not go through. The high premium and large breakup fee of this transaction did not go through well with investors, however, and they sent the share price of Halliburton tumbling a full 10% in intraday trading. This was a complete overreaction.

Those disliking Halliburton’s high premium for Baker Hughes are forgetting that Halliburton made the deal now for a reason: falling oil prices had ravaged oil companies’ share prices, sending oil majors like Baker Hughes and Halliburton down 30-40% from highs. Halliburton’s “large premium” for the acquisition of Baker Hughes was actually only 1% above the highs Baker Hughes had achieved just months ago, meaning that Halliburton had actually bought out the company at a significant discount, theoretically buying the company for only a 1% premium if oil prices stabilize.

The other investors that sold on the $3.5 billion breakup fee may have a bit more merit to their argument, however, it is still flawed. The norm of acquisition breakup fees for companies is only 4% of the total transaction amount, and Halliburton’s is 10%. This is a very hefty amount, and leaves Halliburton to lose a lot if this deal goes awry. A major issue that could cause the buyout to stop is regulators. It is not very likely that regulators would approve this deal if Halliburton had simply made the offer without any planning ahead, since the combined company would control too much power and would be able to create a virtual monopoly. However, Halliburton has already said that they are willing to sell off parts of their business that generate $7.5 billion in revenues in order to convince regulators to okay the deal. $7.5 billion for Halliburton is almost 1/4 of their total revenues, and it’s extremely doubtful that regulators would still not allow the deal if Halliburton is willing to chop off 1/4 of its businesses to get it done. Also, if the deal does indeed not go through for some improbably reason, Baker Hughes has also offered Halliburton a $1 billion breakup fee, meaning that the total amount Halliburton would lose would only be $2.5 billion.

Halliburton is a strong company with strong growth prospects riding through the American oil boom. The acquisition of Baker Hughes would only strengthen its industry position, and would let it dominate the oil services market, surpassing rival Schlumberger. Halliburton’s drop on this deal is completely unwarranted, along with the recent slump of oil prices. The company is in a great position right now, and will be even better once the Baker Hughes deal goes through.

Gilead (GILD) High Growth Potential

Gilead is a leading biotechnology company that specializes in hepatitis C curing. They are best known for their biggest drug: Sovaldi. The company has achieved stellar growth in the past two years, but is still priced at a very cheap valuation and has very high growth prospects for the future.

Undervalued

The primary reasoning for Gilead’s low valuation (forward P/E ratio of just 10) is that there are fears that Sovaldi, which generates nearly 50% of the company’s revenues, is priced too high and would not generate enough sales. This has already turned out to be a misconception, however, since the drug has already generated massive revenue streams for the company, and has proved that people would still buy and use the drug despite the price tag. Also, Sovaldi is easily the leader in the hepatitis C industry, since it has both the safest and most successful results for curing hepatitis C. Therefore, Gilead does not deserve this low-valuation multiple, and, based on the company’s success in the past and its massive pipeline that has a lot of potential for the future, is at least worth twice as much as its current market cap.

Growth Potential

Gilead’s management has already demonstrated its ability to dominate a health care industry, as they did with Sovaldi and hepatitis C. They can easily carry this ability into other industries, and are certainly trying to, with drugs for HIV/AIDs, Oncology (tumors), and Cardiovascular and Respiratory diseases in their pipeline. Also, Gilead has barely scratched the surface of international sales, with international Sovaldi sales for the first quarter of 2014 at just $200 million, while American Sovaldi sales were at $2 billion. With the rest of Gilead’s products at a 60-40 domestic to international sales ratio, Sovaldi has a lot of room to grow internationally.

Gilead is an undervalued company with an impressive, industry-dominant position. They still have a lot of growth potential ahead of them through international sales and their large pipeline, which the market is discounting due to a supposed high-pricing of their main drug, Sovaldi. This concern is misguided, however, since the drug has been performing fabulously since its inception, and should do even better in the future, once international sales get underway.