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Summary

  • Earnings estimates for next year have been slashed dramatically.
  • Technicals don't indicate a clear direction for the stock.
  • The CEO reaffirms the new dividend is safe.

The last time I wrote about Transocean Ltd. (NYSE:RIG) I stated, "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." Since the time the article was published the stock has popped 1.05% versus the 0.01% drop the S&P 500 (NYSEARCA:SPY) posted. 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 16.46% excluding dividends (down 11.87% including dividends), and is losing to the S&P 500, which has gained 20.35% 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 10.48, 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 9.19 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.41 per share and I'd consider the stock inexpensive until about $66. 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

21Apr14

40.54

10.48

9.19

4.41

66

N/A

-0.94

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 5.53% 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 5.53% 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

21Apr14

5.53

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 bouncing off of oversold territory back on 14Mar14 with a current value of 46.34. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars flat in height, not really indicating momentum at all. As for the stock price itself ($40.54), I'm looking at the 50-day simple moving average (currently $41.42) to act as resistance and $38.87 to act as support for a risk/reward ratio which plays out to be -4.12% to 2.17%.

Recent News

  1. Deutsche Bank upgraded the company from "sell" to "hold". The upgrade was primarily upgraded because the bank felt Transocean was oversold.
  2. The CEO reaffirmed the upcoming increase in the dividend is safe. Mr. Newman says the company is capable of navigating rough seas to maintain the growth in the dividend.

Conclusion

The energy sector is completely under-owned right now but I don't know that Transocean is the way to play it anymore. Fundamentally the company is inexpensively priced based on future earnings but next year's earnings estimates have been slashed dramatically. Financially, the CEO reaffirmed the dividend is safe but that means nothing to me a-la Dow Chemical (NYSE:DOW) and General Electric (NYSE:GE) right before the Great Recession. On a technical basis I believe the stock is at an inflection point. Due to the ambiguous technicals, earnings estimates getting cut dramatically, and uncertainty around the dividend I will not be pulling the trigger here right now.

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!

Disclosure: I am long RIG, GE, SPY. 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.

Source: Can High-Yielding Transocean Navigate Through Rough Waters?