Stock of the Week
NYSE Symbol: DO
Industry: Oil driller
Price as of 4/20:$68.57
First quarter earnings are flooding in with much better than expected results. Concerns of global weakness in Europe and Asia haven't hurt either corporate earnings or guidance so far. In the tech space the two leaders Google and Apple have taken a hit this week, but luckily Microsoft, Ebay and the cloud computing stocks have taken up the slack. The financials are reporting better than expected earnings, but a lot of the good news has been priced into the stocks at least in the short run. Other than utilities, one of the weakness sectors so far this year has to be energy and commodity related stocks. Weakness in Europe and Asia and an abnormally warm winter cut demand dramatically, particularly for natural gas and coal. But not all commodity related stocks are struggling. This week we'll feature an oil and gas driller with a hefty yield. The featured stock of the week is Diamond Offshore. Diamond Offshore struggled last year, but since the turn of the calendar the stock has been a stand out. Earnings earlier in the week validated the stock's 2012 performance. Even with the run up this year, Diamond Offshore still looks attractive with a hefty 5% dividend to provide support and income to shareholders.
This past week, Diamond Offshore (majority-owned by Loews Corp) made an adjusted profit of $185.2 million or a $1.21 per share, easily beating estimates of 99 cents per share. Utilization rates, a ratio measuring the number of rigs being used as a percentage of a company's fleet, rose in the quarter for Diamond Offshore along with their daily rates for renting the rigs. Management made optimistic projections about winning more rig contracts as the market strengthens. Revenue in the quarter did slip 5% to $768.6 million, but beat market estimates of $756.7 million. The company is in the transition of moving rigs back to the Gulf of Mexico while all eyes are on Brazil following the oil spill by Chevron and Tra nsocean. As one executive put it, " Brazil is the noise in the market that the market doesn't need." Another concern to watch is higher rig maintenance expenses in a tighter regulatory regime, as well as pricier labor with 20,000 more workers required on the many new rigs coming on the market. But even with the higher costs, strong pricing is allowing the Diamond Offshore to generate strong cash flow and earnings.
Even with the run up this year, the stock remains attractively priced thanks in part to the dividend yield. Currently, the stock trades for 16 times earnings, but just 13.5 times next year's earnings. The stock also trades for 2.9 times sales and 2.2 times book value of $31.10 a share. The best feature of the stock is the dividend yield of 5%. Very few companies can boast a dividend yield above 5% outside the utility space and other defensive sectors. The added kicker is the stock goes ex-dividend next week on the 27th so investors looking to get the dividend need to buy the stock before next Friday. Diamond Offshore looks like a good investment in an increasingly volatile market.