Oil & Gas Stocks

Rowan Companies plc Annual Valuation – 2015 $RDC

Rowan_Companies_LogoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – March 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Rowan Companies plc (RDC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Rowan Companies plc is a provider of international and domestic offshore contract drilling services. The Company provides offshore contract drilling services utilizing a fleet of 31 self-elevating mobile offshore drilling platforms (jack-up rigs). Its primary focus is on jack-up rigs, which its customers uses for exploratory and development drilling and, in certain areas, well workover operations. In addition, it had three deepwater drillships, as of December 31, 2011, which was under construction. It conducts offshore drilling operations in various markets throughout the world, and as of February 27, 2012, it had 11 rigs in the Middle East, 10 in the United Sates Gulf of Mexico, six in the North Sea, two in Trinidad, and one each in Malaysia and Vietnam. On September 1, 2011, the Company completed the sale of its land drilling services business. On June 22, 2011, the Company completed the sale of its wholly owned manufacturing subsidiary, LeTourneau Technologies, Inc.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 - PASS
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - FAIL
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - FAIL

Valuation Summary

Key Data:

Recent Price $17.41
MG Value $0.00
MG Opinion Overvalued
Value Based on 3% Growth $21.14
Value Based on 0% Growth $12.39
Market Implied Growth Rate 1.72%
Net Current Asset Value (NCAV) -$22.38
PEmg 11.94
Current Ratio 2.83
PB Ratio 0.46

Balance Sheet – December 2014

Current Assets $941,000,000
Current Liabilities $333,000,000
Total Debt $2,807,000,000
Total Assets $8,411,000,000
Intangible Assets $0
Total Liabilities $3,720,000,000
Outstanding Shares 124,200,000

Earnings Per Share

2014 -$0.93
2013 $2.03
2012 $1.46
2011 $5.83
2010 $2.36
2009 $3.24
2008 $3.77
2007 $4.31
2006 $2.85
2005 $2.08
2004 $0.25

Earnings Per Share – ModernGraham

2014 $1.46
2013 $2.76
2012 $3.20
2011 $4.01
2010 $3.17
2009 $3.47

Dividend History

Conclusion:

Rowan Companies plc is not suitable for the Enterprising Investor or for the Defensive Investor.  The Defensive Investor is concerned by the the lack of earnings stability or growth over the last ten years, and the inconsistent dividend history.  The Enterprising Investor is concerned by the level of debt relative to the net current assets, and the lack of earnings stability or growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $3.17 in 2010 to $1.46 for 2014.  This lack of demonstrated growth does not support the market’s implied estimate of 1.72% annual earnings growth over the next 7-10 years, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Rowan Companies plc (RDC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Rowan Companies plc (RDC) or 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.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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