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Summary

  • Transocean yields 5.58%.
  • Management’s financial efficiency ratios have dropped.
  • Citi says the stock has bottomed.

The last time I wrote about Transocean Ltd. (NYSE:RIG) I stated, "I'm only buying a small position because I'm still a bit worried about the industry and any further downgrades." Since the time the article was published the stock has dropped 6.24% versus the 2.37% gain the S&P 500 (NYSEARCA:SPY) posted. It's quite unfortunate that I did plow additional money into the company at the time. Transocean is an international provider of offshore contract drilling services for oil and gas wells by operating in contract drilling service and drilling management services business segments.

On February 26, 2014, the company reported fourth-quarter earnings of $0.73 per share, which missed the consensus of analysts' estimates by $0.02. In the past year the company's stock is down 25.09% excluding dividends (down 20.49% including dividends), and is losing to the S&P 500, which has gained 19.94% 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 10.37, 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 8.01 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $5.01 per share and I'd consider the stock inexpensive until about $75. The 1-year PEG ratio (2.57), 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 expensively priced based on a 1-year EPS growth rate of 4.03%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 18.72%. Below is a comparison table of the fundamentals 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

51.00

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

19Feb14

42.79

9.30

8.21

5.21

78

0.36

26.00

20Mar14

40.12

10.37

8.01

5.01

75

2.57

4.03

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 5.58% with a payout ratio of 58% of trailing 12-month earnings while sporting return on assets, equity and investment values of 4.3%, 8.6% and 7.2%, 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 5.58% 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

49

2.1

4.4

5.4

25Nov13

4.39

49

2.1

4.4

5.4

26Dec13

4.66

49

4.9

10.2

5.4

19Feb14

5.23

49

4.9

10.2

5.4

20Mar14

5.58

58

4.3

8.6

7.2

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock bounced off of oversold territory on 14Mar14 and has a current value of 37.9 with upward trajectory. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is trying to cross above the red line with the divergence bars increasing in height, indicating bullish momentum. As for the stock price itself ($40.12), I'm looking at $40.83 to act as resistance and $39.27 to act as support for a risk/reward ratio which plays out to be -2.12% to 1.77%.

Recent News

  1. Citigroup (C) upgraded the company from "Sell" to "Neutral". Citi believes the demand for rigs will stabilize and recover within the next 12 months and states the current pain will not last much longer.
  2. The company updated that status of its rigs a couple of days ago. The company stated it signed a three-month extension on one rig while another one is now idle putting the number of idle rigs at four.
  3. On 26Feb14 the company reported earnings and revenue which missed expectations. Earnings were $0.73 which missed estimates by $0.02 on revenue of $2.33 billion which missed by $30 million.

Conclusion

Deep-water drillers are getting attacked by downgrades left, right, and center lately. This industry is very tough to navigate right now and isn't for people who can't stomach further pain as day-rates for rigs continue to go down. Fundamentally, the stock is inexpensive on next year's earnings but expensive on earnings growth. Financially, the dividend is covered very well, but management's financial efficiency ratios have dropped. Technically, it appears the stock has found at least a short-term bottom and has some bullish momentum. Due to the inexpensive valuation on next year's earnings, bullish technicals, and high dividend yield I'm going to be buying a small position at this price. Because I swapped out ConocoPhillips (NYSE:COP) for Transocean in my dividend portfolio it is only fair that I provide an update from the swap-out date. From August 20, 2013, Transocean is down 13.77% while Conoco is up 3.14%; the trade has not worked since early November 2013. I still like the prospects of Transocean over Conoco in the long term and will continue to provide updates.

(click to enlarge)

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: Is 5.58% Dividend Yielding Transocean In Deep Water?