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The last time I wrote about Transocean Ltd. (RIG) I stated, "I will not be adding to my position now because I think I can get it at a lower price." Since the last article it has dropped 4.98% versus the 2.02% gain the S&P 500 (SPY) posted. Transocean is an international provider of offshore contract drilling services for oil and gas wells.

On November 6, 2013, the company reported third quarter earnings of $1.37 per share, which beat the consensus of analysts' estimates by $0.30. In the past year the company's stock is up 8.51% excluding dividends (up 10.79% including dividends) and is losing to the S&P 500, which has gained 29.51% in the same time frame. With all this 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 buying more shares of the company right now for the basic materials sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 10.46, 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 8.59 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $5.61 per share and I'd consider the stock inexpensive until about $84. The 1-year PEG ratio (0.31), 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 the company is inexpensively priced based on a 1-year EPS growth rate of 34.06%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 34.06%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 19.67%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

20Aug13

46.53

10.16

8.19

5.68

85

0.27

37.51

25Nov13

51

11.14

9.05

5.64

85

0.32

34.85

26Dec13

48.48

10.46

8.59

5.61

84

0.31

34.06

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 4.66% with a payout ratio of 49% trailing 12-month earnings while sporting return on assets, equity and investment values of 4.9%, 10.2% and 5.4%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 4.66% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

20Aug13

4.81

48.9

2.1

4.4

5.4

25Nov13

4.39

49.0

2.1

4.4

5.4

26Dec13

4.66

49.0

4.9

10.2

5.4

Technicals

(click to enlarge)

Looking first at the relative strength index chart (RSI) at the top, I see the stock bouncing off of oversold territory with upward trajectory and a value of 45.07. I will look at the moving average convergence-divergence (MACD) chart next. I see that the black line is about to cross above the red line with the divergence bars increasing in height, indicating bullish momentum if it can actually cross above. As for the stock price itself ($48.48), I'm looking at $50.55 to act as resistance and $45.69 to act as support for a risk/reward ratio which plays out to be -5.75% to 4.27%.

Recent News

  1. Citigroup downgraded the stock from a "neutral" to "sell" rating with a $40 price target citing that pricing power is beginning to erode.
  2. Shell (RDS.A) (RDS.B) will begin to drill off the coast of Alaska in 2014 with a Noble (NE) drillship while having a Transocean semisubmersible on standby if a relief well is required.

Conclusion

I believe Citi will be wrong on the call it made by slapping a sell rating on the company recently. Fundamentally the company is inexpensively priced based on future earnings and growth potential while having excellent short and long-term earnings growth potential, albeit the estimated earnings potential for next year has dropped a bit. Financially the company has improved its returns on assets and equity since the last time I wrote about it. Technically I see the stock bouncing off from oversold territory. The company has great growth projections, has a high dividend yield and has bullish technicals for the short-term. It is for these reasons I'm going to layer into my position here.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Buying High Yielding Transocean Right Now