Down with ESV?

In the past 3 months I’ve watched my Transocean stock (ticker RIG) swing from up to a 12% positive gain all the way down to a 7% loss as of today’s close (19% downward swing in the last few months).  Today’s drop was partially predicated on UBS downgrades for the major offshore drillers.  They cite a “near-term bear cycle and jack-up over supply concerns” as impetus for the downgrade.  Based on today’s valuations, Transocean and Ensco (ticker ESV) have roughly the same metrics of a 1.0 price to book value, leading P/E ratios around 8, 5%- 5.50% current dividend yield, and healthy cash flows.  Finding long-term stable companies with these metrics are not easy to find in today’s stock market and make for a perfect ATG sweet spot selection.  Props must be given to moMANon, who has been championing the offshore drillers for some time and helped me pocket some gains for the fancy new Mazda I bought at the end of last year.   

Today I added to my position in offshore drillers and bought some Ensco (ESV) to go along with my current RIG position, primarily because they are less leveraged than RIG, offer a higher dividend (5.5% vs. 4.8%), and have the same basic valuation metrics today.  Management continues to invest in future rigs, is projecting continued revenue growth over the next several years, and meaningful dividend increases or share buy backs are on the table.

Ticker ESV   Comments
Company Ensco plc    
Current Price/ Share 52.61    
LTM P/E 9.63    
Forward P/E 7.82   There’s a lot of room for error at these levels!
LTM ROE 10.8%   No show-stopper, but I’m ok with it given the low leverage.
Price/ Book Value 1.02   Very attractive given quality of assets.
LTM EV/ EBITDA 7.6    
LTM Dividend Yield 4.1%   Forward dividend yield of 5.5%!
Est. Rev. Growth (5 yrs) 13.6%    
Debt/ Equity 38.0%   Major selling point when compared to RIG. 
Neat-O-Statistic According to management’s last quarterly call, the company has   over $18 Billion in backlog guaranteed future contract revenue, which is   approx. 150% of today’s market cap!
ATG Takeaway This one checks all the boxes.    There will come a day when alternative energy dramatically changes the   energy landscape of this world, but this company is simply valued too cheap   right now with too much guaranteed future revenue for me to lose any sleep   over this.  If I could find 10 stocks   like this in various industries, I’ll fly to New York and eat the “gold   flake hamburger” by the end of the year 🙂
ATG Gut check      
1.  Mkt leader with moat-like Characteristics? Y Yes.  World’s second largest offshore driller   with one of the newest rig fleets and additional rigs under construction.
2.   Strong long-term growth prospects and   relevance? Y Yes.  They operate in 6 continents with several   growth opportunities.  I know fracking/   shale gas is the big buzz word these days, but I’m not 100% sold on fracking-   my relatives in N. Colorado swear that their drinking water has tasted like   crap ever since they started fracking there 😉
3.  Healthy balance sheet?   Y 38% leverage, ample free cash   flow/ working capital, no red flags from my cursory review.   Talk of increased dividends and share buy   backs given the amount of new capital spend already in the works is the sign   of a management team very confident about their current financial position.
4.   Favorable valuation based on P/E, ROE, etc? Y Cheap based on a P/E and price   to book basis, particularly given that analysts are still projecting revenue   growth for the company.

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