In general, over the years, I have had respect for John Buckingham, who writes The Prudent Speculator.? I caught this because we own the? same stock Ensco plc.? As he said:
For instance, Ensco PLC (ESV) is the world?s second largest offshore driller, operating in six continents with one of the newest jackup and deepwater fleets in the industry. The company has shown a relatively impressive ability to keep operating expenses in check and generate solid free cash flow, while the P/E is less than 10, the dividend payout is more than 5% and profits per share are expected to increase from $6.14 last year to $6.67 this year and $7.79 in 2015. In short, we find Ensco to be a high-yielding, value-priced, financially-strong growth stock, operating in an industry with high barriers to entry and favorable long-term demand characteristics!
Great minds think alike, and fools seldom differ.? You shouldn’t buy Ensco after reading this unless you have studied it out.? Just because I agree with a comrade does not mean you should take action.? We could both be wrong.
At the end of his piece he listed many summary statistics of his portfolio.? I want to compare his with mine:
Dividend yield: His: 2.3%, mine 2.2%
P/E: His 15.9x, mine 12.0x
P/B: His 1.65x, mine 1.48x
P/S His 0.86x, mine 0.68x
I don’t look for dividend yields, and many European stocks that I own pay dividends, just not regular dividends — the philosophy is different there.
One thing that is different for me versus Buckingham is that I have more foreign stocks in my portfolio.? I am willing to consider companies in countries that follow the rule of law.
I have done better, and you are free to ask me how.? My main idea is to search for the best ideas regardless of where they are domiciled, or what size they are.? I analyze stocks regardless of how they are categorized by most.
Full disclosure: long Ensco plc [ESV]
I’ve own ensco for a few years on same valuation analysis. I can’t figure out why it remains cheap. Einhorn I believe was a vocal long a few years ago but believe he sold out.
They seem to be the best run off-shore driller and are quite cheap to the market overall. Materials/energy stocks haven’t performed well for a while.
I’ve tried to figure out why they remain cheap and have proposed two ideas.
1) Is the industry similar to shipping with booms and bust. Are there fears that too many rigs will be built and pricing power will disappear? I think they have contracts for 2-3 years in place. So near terms I don’t believe they can take a huge profit hit. Do not believe they have much leverage at all at a financial level. So the fear is some sort of industry operational leverage. Pricing power disappears from overbuilding etc. Consider this possible. Also caught an article a while ago about China trying to get into the business. As a rule of thumb I don’t like investing in anything that one of the Asian economies is willing to subsidize in order to gain economies of scale. They’ve destroyed many American electronics companies in the past. Not sure if its a real fear but when looking for answers I came up with this.
2) Fears of end of oil. Any widespread adoption of electronic cars would destroy the oil market. If the world even goes 30% electric cars it destroys the marginal buyer of oil. Is this a legitimate fear and why the market won’t price esv at a market multiple?
I wouldn’t own esv at a market multiple because of these fears, but near term profits out the next 3 years seem fine and I don’t have trouble owning esv at this price.
Its been crushed of late so perhaps a decent buying opportunity.
Bought a little bit more today — Full disclosure: long ESV
sditulli, your 1st explanation is likely correct. There is considerable ongoing manufacturing of new jackups, and the market may be swamped with over-capacity in a few years. With Ensco, you effectively have an annuity locked in for the duration of contracts, but once that annuity expires, the day rates may well plummet. Perhaps the business is cheap in spite of this; I have not studied it closely, and am no expert on the stock or the sector, but you should be aware that this is a significant risk.
This is a significant risk in the short-term, but one mitigated by depletion of lower cost sources of oil in the intermediate term. Just my two cents, though, on a day when all 38 of my stocks are down. Can’t remember the last time that happened.
A very smart analyst I know shares your views on this; I don’t have enough knowledge to judge, however.
I was also completely in the red today; it’s quite unsettling.
Thanks both of you for your opinion. It confirmed my suspicions.
I think both thesis have a bit of truth in them. The higher future oil costs only plays out if cars still drive on oil 10 years out so I think that combines with fears that we may have overbuilding in the sector.
Stock still looks cheap to me and these risks seem factored into it.