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Summary

  • The stock yields 6.61% with the recently increased dividend.
  • The stock has popped 9.91% in the wake of the current geopolitical issues.
  • Next year's earnings estimates are keep getting slashed.

The last time I wrote about Transocean Ltd. (NYSE:RIG), I stated, "Due to the deteriorating sentiment on the industry, expectations of earnings contraction for next year, and "value trap" characteristics, I will not be adding a position right here." The stock has popped 9.91% versus the 4.8% gain the S&P 500 (NYSEARCA:SPY) posted during that time frame. It's safe to say that I've lost out on not making a transaction. But the stock had been lagging the S&P 500 up until a week ago when the tensions in Iraq started to flare up. Along with the geopolitical flare up came a flare up in oil related stocks such as Transocean. Transocean is an international provider of offshore contract drilling services for oil and gas wells by operating in the contract drilling service and drilling management services business segments.

On May 7, 2014, the company reported first-quarter earnings of $1.43 per share, which beat the consensus analysts' estimates by $0.41. In the past year, the company's stock is down 5.4% excluding dividends (down 0.09% including dividends) and is losing to the S&P 500, which has gained 23.26% in the same time frame. Since initiating my position back on 20th August, '13, I'm up 5.01%, including dollar cost averaging and reinvested dividends. With all this in mind, I'd like to take a moment to evaluate what's going on in the world of oil right now and then evaluate the stock on a fundamental, financial and technical basis to see if right now is a good time to purchase more of the stock for my dividend portfolio.

What's Going On In The World Of Oil?

So it seems lately that when the weekend hits a new record high is recorded on the major indices. But oil has begun to increase in price as geopolitical tensions began to intensify in Iraq. Obviously with higher oil prices comes a higher price for oil related stocks. Oil prices will continue to be elevated as long as the crisis in Iraq persists. The American government however has the necessary ammunition to keep oil prices down by tapping into the Strategic Petroleum Reserves. This may be the passive way of getting oil prices down when compared to the alternative of sending troops into Iraq to pacify the situation. One can certainly argue that once the situation is diffused that oil prices will drop because there really isn't much demand for it from a world growth perspective as the International Monetary Fund recently lowered its growth outlook for the U.S.

This crisis is what I believe has been the cause of the escalation in stock price for Transocean as there hasn't been any news of late related to the company itself. So let's take a look now at the fundamental, financial, and technical perspectives of the stock.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 10.63, 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 12.68 is currently inexpensively priced for the future in terms of the right here, right now. The forward P/E value that is higher than the trailing twelve month P/E value tells us the story of earnings contraction in the next year. However, next year's estimated earnings are $3.58 per share while the trailing twelve month earnings per share were $4.27, I never like that. Next year's estimated earnings are $3.58 per share and I'd consider the stock inexpensive until about $54. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 14.2%. 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

51.00

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

20May14

41.29

9.67

11.24

3.67

55

N/A

-18.50

22Jun14

45.38

10.63

12.68

3.58

54

N/A

-16.71

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 6.61% with a payout ratio of 70% of trailing 12-month earnings while sporting return on assets, equity and investment values of 4.7%, 9.3% 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 6.61% 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 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

20May14

5.43

52

4.7

9.3

7.2

22Jun14

6.61

70

4.7

9.3

7.2

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock in overbought territory with a current value of 69.45. 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 flattening in height, indicating the bullish momentum is getting tired. As for the stock price itself ($45.38), I'm looking at $45.94 to act as resistance and $44.22 to act as support for a risk/reward ratio, which plays out to be -2.56% to 1.23%.

Conclusion

From a macroeconomic perspective, obviously with higher oil prices comes a higher price at the pump for the consumer. When there are higher prices at the pump, we as consumer economy begin to tighten the purse strings and not go out for dinner as much or buy those shoes we like, but instead begin to focus on the necessities in life. Analysts begin to lower growth estimates of companies when a consumer economy begins to focus just on the necessities of life. When lower forecasts by analysts are predicted for the economy, P/E ratios begin to drop and then so does the overall market and along with it, Transocean.

From a company perspective, I never like paying more for future earnings than I did in the past, because that means that earnings in the future are going to be less than what they were in the past. I always invest with my sights on the future, and increasing earnings is what should happen in the future. Fundamentally, next year's earnings estimates keep getting slashed, but the stock is inexpensive at these levels with respect to those earnings estimates. Financially, the company has increased the dividend dramatically along with the dividend payout ratio with respect to earnings. On a technical basis, the stock is in overbought territory and may be due for a decline.

The situation in Iraq has definitely made the "rising tide lifts all boats" phrase come to fruition with Transocean. I'm going to continue to monitor the situation carefully because once it gets diffused I believe it can be a rough ride down for Transocean, unless earnings estimates can stabilize soon. The stock is still definitely on my radar though because of the high yield, buying the stock at the beginning of the month in order to get a slice of that dividend, but I probably won't be buying anymore and it will definitely be on my cut list come August.

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 It Time To Sell The Rip In High-Yielding Transocean?