We find the record-low interest rate environment to be very supportive of further gains in equity prices. That does not mean that we won't soon see a correction. But with low inflation and not-too-hot, not-too-cold U.S. economic data and profits and balance sheets remaining strong, equity valuations still seem reasonable.
We retain our long-term enthusiasm for our broadly diversified portfolios of undervalued stocks -- such as two energy issues: Ensco (ESV) and Halliburton (HAL).
Ensco is the world's 2nd largest offshore driller. The firm operates across six continents with one of the newest jackup and deepwater fleets in the contract drilling in dustry, including 9 drillships, 13 dynamically-positioned semisubmersibles, 6 moored semisubmersibles and 46 premium jackups.
Ensco recently reported Q1 earnings of $1.36 per share versus consensus estimates of $1.30 on revenue of $1.15 billion. ESV once again showed an impressive ability to keep operating expenses in check and generate solid free cash flow.
We believe that the outlook for deepwater drilling remains attractive and Ensco is well positioned to benefit. The company should continue its upward earnings trajectory as newbuilds come on line and it realizes favorable contract rollovers.
ESV has a solid balance sheet and future cash use should provide another near-term catalyst, coming in the form of additional rig capacity, debt reduction or share buybacks and dividend increases.
ESV shares are trading at less than 9 times forward earnings estimates, and offer a nearly 3.5% dividend yield in a desirable part of the energy sector.
Halliburton provides a suite of evaluation, drilling, production and completion services across North America and approximately 80 countries.
HAL serves a variety of national, international, and independent oil and gas companies. It is the 2nd largest provider of oil services and the largest pressure pumping service provider worldwide.
Although Halliburton ran into some softness in its international business in Q1, impressive North America results pushed earnings per share to $0.67, versus analyst forecasts of $0.57. More importantly, management expects North American margins to improve throughout 2013.
We are optimistic about HAL's international business and believe India and China offer lucrative opportunities. Additionally, we like that the firm offers innovative products and is capturing an increased market share of the growing deepwater rig space.
HAL has a solid balance sheet and generates strong cash flow, allowing it to boost the dividend almost 39% earlier this year. Shares currently change hands at 13 times forward earnings projections.
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