Transocean (NYSE:RIG) is an international provider of offshore contract drilling services for oil and gas wells. On August 7, 2013, the company reported second quarter earnings of $1.08 per share, which was in-line with the consensus of analysts' estimates. The stock is up 4.19% in 2013 and is losing to the S&P 500, which has gained 15.41% in the same time frame, and with that in mind I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if it's worth initiating a new position in Transocean right now for the basic materials sector of my dividend portfolio.
Transocean currently trades at a trailing 12-month P/E ratio of 10.16, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 8.19 is currently inexpensively priced as well for the future in terms of the right here, right now. Next year's estimated earnings are $5.68/share and I'd consider the stock cheap until at least $85. The one-year PEG ratio (0.27), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon) tells me that Transocean is expensively priced based on a 1-year EPS growth rate of 37.51%.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. Transocean boasts a dividend of 4.81% with a payout ratio of 48.9% of earnings while sporting return on assets, equity and investment values of 2.1%, 4.4% and 5.4%, respectively, which are all respectable values, but nothing to write home about. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 4.81% yield of this company is good enough for me to take shelter in for the time being. Thanks to Carl Icahn the company has initiated a dividend as of May 2013. There is no history of a consistent dividend payout so this may deter dividend growth investors from investing in the company.
Looking first at the relative strength index chart (RSI) at the top, I see the stock near oversold territory with a value of 35.23 but with downward trajectory, which is a bearish pattern. To confirm that, I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is below the red line with the divergence bars increasing in height to the downside, indicating the stock has downward momentum. As for the stock price itself ($46.53), I'm looking at $48.15 to act as resistance and $45.86 to act as support for a risk/reward ratio, which plays out to be -1.44% to 3.48%.
- On 16Aug13 Johnson Rice downgraded the company to "underweight" from "overweight" stating that Transocean's earnings are at risk because competitors are adding new rigs.
- With the plethora of 13-F filings last week we saw Carl Icahn increase his stake in the company by 1.3 million shares.
- Global Hunter cut its rating on the company on 09Aug13 from "buy" to "neutral" stating the outlook for both deep-water and mid-water rigs is bleak.
- The company added about $2 billion in backlog to the already $28 billion worth of backlog by securing extensions for two ultra deep-water rigs in the Gulf of Mexico for Chevron.
Transocean is inexpensively valued based on future earnings and on future growth prospects (one-year outlook). Financially, the dividend payout ratio is middle of the road and I don't doubt management will be able to continue to increase the dividend going forward. The technical situation of how the stock is currently trading is what is telling me that it can trade a bit lower for now as the stock has downward trajectory on the RSI and MACD charts. Because it is at such a good value right now I'm going to buy a small batch in the stock for now in hopes that I can get a larger stake at a later date with a higher yield.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.