Transocean: Cheap Stock, Worth a Look

The market has certainly taken a turn for the worse, but it still presents a great long term buying opportunity. Transocean Incorporated (RIG) is a great company. It is a company that is attractive to both value and growth investors.

Transocean is the world's largest offshore drilling contractor. It has over 50 years of experience and its performance shows. In the past three years, it has steadily doubled from about $70 to more than $140. In that same period, the company has missed earnings only twice (both in 2006) and has solidly beat estimates since then. It is an aggressive leader in its industry in several ways.

In addition to being the largest contractor of offshore drilling services, it has a presence in every continent of business. The company boasts a return on equity of 36%, better than 93% of its competitors. The company is aggressive with debt and has a price to earnings ratio of just 9.5, lower than 94% of its competitors. RIG's operating margin is better than 96% of its competitors at over 50% and its trailing twelve month earnings growth is 89%.

These aspects make Transocean a great buy. It is a relatively cheap company with great credentials and surely worth a look.

Disclosure: None

Comments

[Dan Jacome:]

all you did is tell us what the company has done in the past. Efficient market hypothesis stresses this is all priced in, so where is the upside? Where is the valuation? Article title says "cheap stock" and not one word on how to think about this stock in terms of valuation!

2008 Jun 09 02:42 PM

[pachanguero:]

great stock and great call!!!

2008 Jun 09 03:00 PM

[Eric Frantz:]

I did not come up with that title and the fact is, the factors listed above about the company make it a much more compelling buy than other stocks. I understand that past performance is not an assurance of the future, but it can be used to show the effectiveness of a company in its market and its future potential.

2008 Jun 09 03:45 PM

[John L.:]

I agree, this is an outstanding buy, especiallly now. They took a small tumble recently so now is a great time to buy on this weakness.

PE valuation is enormously cheap given the growth potential and the 2 year backlog.

2008 Jun 09 09:48 PM

[Vox Rationalis:]

Fish dish partners said: "Where is the valuation? Article title says "cheap stock" and not one word on how to think about this stock in terms of valuation!"

Er, what are ROE, P/E, operating margin and earnings growth, if not indicators of valuation? Granted, this is a too-short piece, but it's not like there's nothing there.

2008 Jun 09 11:27 PM

[Brian Pursley:]

Deep Water Blog: oilismastery.blogspot..../

2008 Jun 10 04:49 AM

[User 59050:]

PEG is less than 1. PE is less than 10 . .but PSR is 5.79 and according to Ken Fisher a cheap stock has a PSR less than 1. This is confusing to me and I don't know whether the stock is cheap or not. How does PSR relate to PEG. If PEG less than 1 means undervalued but a stock has a PSR of 5.79 . .which indicator should be relied upon? How can both be right?
Thanks to anyone. I'm learning.

2008 Jun 10 08:46 AM

[Alphameister:]

Check out what happened to RIG's earnings between 2001 and 2003 and you will have a better understanding of the reluctance of many investors to accord a high p/e to stocks in this sector. Historically, this has been a highly cyclical growth industry. Barring institution of an "excess profit tax" on oil companies, I believe we are in the EARLY stages of a drilling boom that will carry the stocks of drillers and servicers much higher. We are nowhere near peak earnings in the sector. RIG is my top holding in the group. PSR is much less than 5.79 looking forward, and Ken Fischer has seldom owned the top-performing stocks in such growth sectors as biotech, software, internet, etc. where PSRs only drop below 1 when a company has encountered serious problems.

2008 Jun 10 10:28 AM

[User 59050:]

thanks for putting that in perspective for me, alphameister. i appreciate your comments.

2008 Jun 10 02:51 PM

[BlueDome:]

RIG has a high PSR largely because it has high margins, which is a good thing. To judge value, you have to compare the PSR to other companies in the same industry.

In a low margin industry, like utilities, a very different range of PSR will exist.

2008 Jun 10 09:22 PM

[magor:]

Transocean is the best deep sea driller in the world. Suppose they
find enormous quantities of oil at depths of 35000 feet? Is the technology available and the economics of bringing this
oil to market feasible?

2008 Jun 11 08:28 AM

[Kezorm:]

Marvin,

The Brazilians ARE finding enormous quantities of oil and gas at depths of 35000 or more feet.

And, yes, the technologies are, or will be available to enable production from these depths. It might not be as cheap to produce as oil used to be, but it will be there through the transition to alternative supplies of energy.

2008 Jun 11 11:50 PM

[Bharper:]

RIG's margins are at record levels and they are earning 35% on equity. Companies in this industry, historically, have earned high single digits to low double digits on equity. This is an equipment leasing business. It's in a hot area that currently has a big supply/demand inbalance due to high oil prices. But many new rigs are being built.

There's no way RIG earns 35% on equity over the long-term. Assuming a 15% return on equity, which is 50% higher than their historical average, they'd be earning $6.60, and selling at 21x that.

As far as margins, they are currently elevated b/c of the high prices that rigs are commanding. There was a similar supply shortage of shipping vessels a few years ago, and rates soared, and the stocks soared, but collapsed later as new ships came online and rates dropped.

If you buy this stock, you are betting against historical precedent-and you are paying a high multiple to book and normalized earnings in what is usually a mediocre business.

2008 Jun 16 05:05 PM