Bharper

Transocean: Cheap Stock, Worth a Look

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.