Ensco: Waiting for a Buy Signal

| About: Ensco PLC (ESV)

In this post, I would like to review one of the top percent of gainers on the NYSE - Ensco (ESV). Yesterday, when I wrote this, it was trading at $78.65, up $4.21 or 5.66% on the day. I do not own any shares, nor do I have any options on this stock. However, I would like to briefly share with you why ENSCO is rated a 'Buy.'


What does the company do?

According to the Yahoo "Profile" on Ensco, the company:

...through its subsidiaries, provides offshore contract drilling services to the oil and gas industry. Its offshore contract drilling operations include exploration, development, and production of oil and natural gas. As of February 15, 2008, the company owned and operated 44 jackup rigs, 1 ultra-deepwater semisubmersible rig, and 1 barge rig. It also had four ultra-deepwater semisubmersible rigs under construction.

How did it do in the latest quarter?

On April 24, 2008, Ensco reported its first quarter 2008 results. For the quarter ended March 31, 2008, revenue came in at $580.3 million, up from revenue of $514.1 million the prior year same period. Net income increased 17% to $272.0 million or $1.90/diluted share, up from $232.3 million or $1.54/diluted share the prior year.

Perhaps equally important, from my perspective, was that the company which reported $1.90/diluted share, and beat expectations of $1.81/share as surveyed by Thomson Financial.

What about longer-term results?

According to the Morningstar.com "5-Yr Restated" financials on ESV, the company has increased revenue (except for a slight dip from 2003 to 2004) from $733 million in 2003 to $2.14 billion in 2007 and $2.21 billion in the trailing twelve months [TTM]. Earnings also dipped from $.66/share in 2003 to $.62/share in 2004 befor soaring to $1.87/share in 2005, and $6.73/share in 2007 with $7.09/share reported in the TTM.

The company does pay a dividend of $.10/share which has been unchanged since 2003. Outstanding shares have been very stable and actually have decreased from 150 million in 2003 to 147 million in 2007 with 147 million in the TTM.

Free cash flow improved from a negative $(126) million in 2005 to a solid $583 million in the TTM. The balance sheet appears solid with $665 million in cash and $540 million in other current assets. This total of $1.2 billion, when compared to the $443 million in total current liabilities yields a current ratio of 2.72.

What about some valuation numbers?

According to the Yahoo "Key Statistics" on Ensco, the company is a large cap stock with a market capitalization of $11.32 billion. The trailing P/E is a very cheap 11.09 with a forward P/E that is even better at 9.15. Thus, with strong estimates going forwards, the PEG works out to a downright reasonable level of 0.53 (5-yr expected).

Even with this apparent reasonable valuation, according to the Fidelity.com eresearch website, in terms of Price/Sales [TTM], the company is still selling at a bit of a premium to its peers with a ratio of 4.89 compared to the industry average of 3.68. Ensco does a bit better in terms of profitability as measured by the Return on Equity [TTM] with a ratio of 27.75%, compared to the industry average of 27.34%.

Finishing up with Yahoo, we can see that there are 144.35 million shares outstanding with 143.02 million that float. As of 5/12/08, there were 13.41 million shares out short representing 4.9 days of trading (the short ratio).

As I have noted above, the company pays a small dividend of $.10/share yielding 0.1%. The last stock split was a 2:1 split back on September 16, 1997.

What does the chart look like?

If we examine the Ensco "point & figure" chart from StockCharts.com, we can see the recent price volatility and the price 'break-out' recently in February, 2008, when the stock broke through resistance at the $56 level and has continued to chart higher since. The stock chart looks quite strong to me.

Click to enlarge


To summarize, I do not need to tell anyone about oil trading at over $100/barrel. In fact, it is well over $100. Without any great scientific analysis, we can fully expect that there will be an anxious effort to obtain reserves and discover more oil deposits. At least, from my amateur view, this appears to be a reasonable expectation, and a driller like Ensco should benefit from this effort.

My selection of this stock was not based on any expectation about what oil prices should do and what this should mean to this company - although I find this environment helpful for this company. But rather, I selected this stock with all of the usual screens and devices that I use to identify potential stocks for inclusion. I like the recent quarter which beat expectations, the longer-term results, the valuation, and the chart. What is there not to like?

Now, if only I had a signal or could justify buying some shares - then this would be a stock I would be buying. But in the meantime, I shall try to wait patiently for the proper moment to be doing anything.

Disclosure:  The author has no positions in ENSCO.