1. Energy Sector is still undervalued on a PE basis
2. Noble Corp’s valuation is attractive on PE basis
3. NE’s intrinsic value offers a compelling case for value investors to get in
4. Favorable drilling contract terms (rates) in the recent past
Risks and Negative Catalysts:
1. Macro economic - Deterioration of energy prices, negative investor sentiment
2. Sector specific – Competition among contract drillers due to excess capacity build
3. Company specific – Cost overruns in the short run
If forecast P/E is greater than P/E using FY1 estimate, then the stock is attractive. The reasoning behind this is based on accounting principles that takes into account forecasted growth adjusted for over optimism by analysts. Over optimism by analysts in estimating growth rates is discounted using beta coefficient obtained from regression analysis.
Noble Corp. shows up nicely as an under valued stock (quantitative screen uses more than 40 parameters).
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The quantitative screen uses parameters such as P/E, P/B and other parameters based on academic back testing. Some of the parameters are simple such as book value, earnings momentum, analyst coverage etc. Other parameters such as intrinsic to price is based on DDM (dividend discount model). This is calculated using accounting numbers that is publicly reported. Parameters such as insider trades, earnings revisions etc are weighted based on back/alpha testing using regression methods.
Valuation using eVal (eVal is valuation software developed by Russel Lundholm and Richard Sloan) shows significant upside using conservative assumptions. Historical 10k is in the form of a spread sheet. Terminal year assumptions include sales growth that slows to 4%. The model uses balance sheet, income statement and cash flow statements. A cost of capital of 10% is assumed.