Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Highest Dividend Yields Among Undervalued Defensive Companies.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Transocean Ltd. (RIG)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Transocean Ltd. (Transocean) is an international provider of offshore contract drilling services for oil and gas wells. The Company operates in two segments: contract drilling services and drilling management services. Contract drilling services, the Companyâ€™s primary business, involves contracting its mobile offshore drilling fleet, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. Its drilling management services segment provides oil and gas drilling management services on either a dayrate basis or a completed-project, fixed-price (or turnkey) basis, as well as drilling engineering and drilling project management services. As of February 14, 2012, it owned or had partial ownership interests in and operated 134 mobile offshore drilling units. On October 4, 2011, the Company acquired Aker Drilling ASA (Aker Drilling). In February 2011, it sold the subsidiary that owns the High-Specification Jackup Trident 20.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$4.87|
|Value Based on 0% Growth||$2.86|
|Market Implied Growth Rate||57.65%|
|Net Current Asset Value (NCAV)||-$25.12|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Transocean is not suitable for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor has major concerns with the lack of earnings stability or growth over the last ten years, the lack of a strong dividend record, and the high PEmg ratio. Â The Enterprising Investor has concerns with the high level of debt relative to the net current assets, and the lack of earnings stability or growth over the last five years. Â As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through theÂ ModernGraham Valuation Index. Â As for a valuation, the company appears significantly overvalued after seeing a drop in its EPSmg (normalized earnings from $8.42 in 2010 to an estimated $0.34 for 2014. Â This demonstrated lack of growth does not support the market’s implied estimate of 57.65% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Transocean Ltd. (RIG)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Transocean Ltd. (RIG) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.