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Ensco (ESV) may present an opportunity for investment in the offshore oil and gas industry, but it is important to take a moment to look through its financials to have a factual background to use when comparing it to other investment opportunities. As a whole, the industry seems like it may have some excellent opportunities going forward, though it is very easy (and fun) to speculate about that future. By putting Ensco through a ModernGraham analysis, utilizing modernized techniques taught by Benjamin Graham, we can construct a picture of whether the company is a good prospect for investment when compared against companies in other industries. What follows is a look at how the company fares in the ModernGraham valuation model.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $12.15
MG Opinion Overvalued
Value Based on 3% Growth $71.01
Value Based on 0% Growth $41.63
Market Implied Growth Rate 1.36%
Net Current Asset Value (NCAV) -$21.51
PEmg 11.23
Current Ratio 1.61
PB Ratio 1.02

Balance Sheet – 9/30/2013

Current Assets $1,517,100,000
Current Liabilities $940,500,000
Total Debt $4,743,600,000
Total Assets $19,142,000,000
Intangible Assets $3,366,600,000
Total Liabilities $6,549,800,000
Outstanding Shares 234,000,000

Earnings Per Share

2013 (estimate) $6.05
2012 $5.23
2011 $3.08
2010 $3.80
2009 $5.45
2008 $8.17
2007 $6.73
2006 $4.96
2005 $1.86
2004 $0.69
2003 $0.71

Earnings Per Share – ModernGraham

2013 (estimate) $4.90
2012 $4.60
2011 $4.67
2010 $5.58
2009 $6.13
2008 $5.80

Conclusion:

Ensco is an intriguing company for Defensive Investors and Enterprising Investors, and should be kept on their watch lists. The Defensive Investor’s only gripe with the company is that the current ratio is a little lower than what he would like to see, and the company qualifies for the Enterprising Investor because it also qualifies for the Defensive Investor. These value investors seeking to utilize Benjamin Graham’s methods should keep an eye on Ensco while researching other companies that pass the ModernGraham requirements. From a valuation perspective, the company doesn’t appear like a great value opportunity at the current time. EPSmg (normalized earnings) have dropped from $6.13 in 2009 to an estimated $4.90 for 2013. Meanwhile, the market is implying a growth rate of 1.36%, but since the historical performance has shown a drop in earnings, the market’s estimate is not supported by the historical data. Until the growth in earnings improves, this company may be overvalued.

Disclaimer: The author did not hold a position in Ensco PLC (ESV) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Valuation Of Ensco PLC