Analysis: War, Inc.: A Summary Financial Analysis of One Corporation

The war in and subsequent occupation of the nations of Afghanistan and Iraq, along with the Bush Administration's broad war on terror both at home and abroad, has afforded many corporations the opportunity to benefit from short- and long-term government contracts. The revenues from war-time operations have accrued to a number of companies, most obviously those that could provide war materiel, as well as those that could provide intelligence equipment and facilities, expertise of various kinds, and other goods and services needed by the United States and its allies. However, even those companies that have accrued substantial revenues are not guaranteed profitability as a result of their close relationship with customers in the public sector. Going a step further, however, the fact that some of the greatest beneficiaries of government largesse have proven unable to generate profits for their shareholders has not abated the appetite of sophisticated investors to drive up the prices of these companies' equity issues.

A case in point is Halliburton Company (NYSE:HAL), a firm involved in controversy because its former CEO is now the Vice President of the United States, but more importantly, a firm that has benefited significantly and materially from largesse at the public trough. For many critics of the Administration's close ties to a company formerly led by the U.S. Vice President, the recent announcement by Halliburton of a newly-awarded, $30 million contract to build facilities at Guantánamo represented still more of the large-scale benefits enjoyed by but one of many corporations involved in the Bush Administration's wars, expansionism, and weaponization of the civil world of the early 21^st Century. Although a $30 million contract for Halliburton represents a trivial amount—less than fifteen-hundredths of a percent of its total revenues of last year—there is no doubt that the current, unquestionably neo-conservative policies of the Bush Administration are a curious re-articulation of classical Keynesian government spending for fiscal stimulus into neo-conservative, supply-side policies, merely moving much of the government spending to business interests on the aggregate supply side rather than to needy individuals and families on the aggregate demand side.

This analysis considers the case of Halliburton Holding Co. in the time frame from 2002 to the end of 2004, the period for which the most recent annual financial reports are available.

Elements of Technical Analysis
The following technical summaries are drawn from the income statements and balance sheets of Halliburton Holding Co.

Halliburton revenue from fiscal year 2002 to fiscal year 2004 rose from $12.498 billion to $20.466 billion, representing an annualized growth rate of 27.97 percent.

Gross profit (revenues less cost of revenues) for the same period rose from $119 million to $1.143 billion, for an annualized growth rate of gross profit of 209.92 percent.

Operating income (gross profit less operating expenses) rose from —$186 million to $837 million.

Earnings before interest and taxes (EBIT) rose from —$115 million to $880 million, and net income from continuing operations for the period climbed from —$346 million to $385 million.

The Company took charges against net income from continuing operations in 2002, 2003, and 2004, respectively, of $652 million, $1.151 billion, and $1.364 billion to report net income available for common stock for the three years, again respectively, of —$998 million, —$820 million, and —$979 million.

The Company's total assets rose from $12.844 billion to $15.796 billion, for an annualized growth rate of 10.90 percent; however, the current component of those assets grew from $5.560 billion to $9.962 billion, for an annualized growth rate of current assets of 33.86 percent, more than triple the growth rate of the Company's overall asset base.

Halliburton's liability structure largely mirrors the Company's shift toward a more liquid configuration, with current liabilities rising from $3.272 billion at year end 2002 to $7.064 billion at year end 2004 and total liabilities rising in the same time frame from $9.286 billion to $11.864 billion, meaning that current liabilities over the period grew on an annualized basis by 46.93 percent—again, better than three times the annualized growth rate through the same period of total liabilities, which grew on an annualized basis by only 13.03 percent.

Market Analysis for the Common Stock
Halliburton common stock has risen substantially since 2002, but that is part of a somewhat longer-term trend. The graph at right demonstrates that, after a precipitous sell-off during 2001, the Company's common stock has been on a relatively smooth growth path since the later part of 2002. From September 25, 2002, when the stock had reached its low point of $12.05 per share, to this past Friday, June 17, 2005, when the stock closed at $46.39 per share, the annualized rate of share price appeciation has been 63.89 percent, compared to annualized share price appreciation of 14.57 percent for the Standard & Poor's 500 index over the same period. This means that, while an investment of $1,000 made in an index fund in September of 2002 in the 500 large-capitalization, public corporations comprising the Standard & Poor's 500 would, as of this past Friday, be worth $1,449, an investment in Halliburton stock of $1,000 made on September 25, 2002 would be, as of this past Friday, worth $3,850.

Market Madness, Market Method
During the period under consideration, Halliburton lost money according to its certified financial statements; and according to those same financial statements, retained earnings—an accounting measure of the total value of the claim the shareholders have on the assets of the corporation—eroded from $3.11 billion to $871 million, meaning that the book value of the shareholders' residual in the Company fell by 28 percent from the end of 2002 to the end of 2004.

Yet, despite this, the Company's common stock price, which represents the market's objective assessment of the value of that same residual claim, has risen aggressively compared to market's assessment of the claim on residual value of an index of the 500 largest public corporations in the world. Any possible explanation that could include some "irrationality" on the part of investors is specious: markets do not price based upon irrational sentiments; and this is particularly true in the case of stock in a corporation like Halliburton, where 85 percent is held by institutional investors and only a fraction of a percent is held by insiders. The reality is that Halliburton, which for the year 2004 lost $1.21 per share, has a total value of its equity outstanding of $23.46 billion, and that value has been on a growth path for the past nearly three years. This so-called "market capitalization" is the market price per share times the number of shares outstanding; and this is, therefore, the objective, entirely rational determination of the millions upon millions of buyers and sellers of equities converging from day to day to clear the offers to sell with the bids to purchase stocks.

In the case of Halliburton, the markets are rationally judging that, in spite of the unprofitability and eroding equity value on paper, the Company has been, for the past nearly three years, a worthwhile and worthy investment based upon the expected value of its future cash flows, which is all that matters in financial markets. The historical numbers for Halliburton may be disappointing, but for a company in the forefront of acquiring revenues through providing security in a time of terror threats and supporting supplies and services in a time of wars, the prospects for the future couldn't be brighter.



The Dark Wraith has spoken.