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 Most Undervalued Companies for the Defensive Investor – November 2014.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 Diamond Offshore Drilling Inc. (DO)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Diamond Offshore Drilling, Inc. is a global offshore oil and gas drilling contractor. The Company has a fleet of 44 offshore drilling rigs, consisting of 32 semisubmersibles, seven jack-ups and five dynamically positioned drillships, four of which are under construction. The Companyâ€™s jackups include Ocean King, Ocean Nugget, Ocean Scepter, Ocean Spartan, Ocean Spur, Ocean Summit and Ocean Titan. The Companyâ€™s Deepwater Semisubmersibles include Ocean Alliance, Ocean America, Ocean Apex, Ocean Onyx, Ocean Valiant, and Ocean Star. Ultra-Deepwater Semisubmersibles include Ocean Valor, Ocean Courage, Ocean Monarch, Ocean Baroness, and Ocean Confidence. Ultra-Deepwater Drillships include Ocean BlackLion, Ocean BlackRhino, Ocean BlackHornet, and Ocean Clipper. Mid-Water Semisubmersibles includes Ocean Winner, Ocean Quest, Ocean Concord, Ocean Guardian, Ocean Whittington, and Ocean Yorktown.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- 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 -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â 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 – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
|Value Based on 3% Growth||$64.24|
|Value Based on 0% Growth||$37.66|
|Market Implied Growth Rate||-0.13%|
|Net Current Asset Value (NCAV)||-$13.07|
Balance Sheet – SeptemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Diamond Offshore DrillingÂ qualifiesÂ for both the Defensive Investor and the Enterprising Investor. Â The Defensive Investor is concerned withÂ the level of earnings growth over the last ten years, while the Enterprising Investor is willing to overlook concerns with growth and debt levels because the company passes the more conservative Defensive Investor requirements. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. Â From a valuation side of things,Â the company appears to beÂ overervaluedÂ after seeingÂ its EPSmg (normalized earnings) drop from $7.97 in 2010 to only an estimated $4.43 for 2014. Â This level of demonstrated growth does not even supportÂ the market’s implied estimate ofÂ an annual drop of 0.13% inÂ earnings and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
Be sure to check out previous ModernGraham valuations ofÂ Diamond Offshore Drilling Inc. (DO)Â for greater perspective!
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 Diamond Offshore Drilling Inc. (DO)? 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.
Disclaimer: Â The author did not hold a position in Diamond Offshore Drilling Inc. (DO)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.