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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Noble Corp.

June 13th 2014 Noble Corp.
NYSE Symbol: NE
Industry: Oil driller
Price as of 6/12: $32.87

The broader markets continue to chug along grinding higher. Whether you're bullish, bearish, or investing internationally everything seems to be working so far in 2014. But with the equity markets at all-time highs trading at 16 times earnings (highest level since 2007), with volatility (VIX index) at a 5 year low, and bullish sentiment at pretty high levels, this might be a good time for investors to take a pause and get a little more conservative. Finding attractively priced stocks is getting tougher and tougher. Consumer Discretion or retail has taken it on the chin so far in 2014. A recent featured stock, Dicks Sporting Goods has had some insider buying recently. That's always a good sign. This week we'll turn our focus to the second best performing sector in 2014, energy. Energy has outperformed all other sectors since February thanks to improving fundamentals and high energy prices. But not every energy stock has outperformed. This week we'll highlight an oil driller that has underperformed in 2014, but the future is looking brighter. The stock of the week is Noble Corp. Not to be confused with Noble Energy, Noble Corp is an offshore oil driller with operations in virtually every major ocean and sea in the world. Back in January the company reported disappointing earnings causing the stock to drop over 10%. The stock continued to slid, but then based around $30 a share. In the last month the stock has perked up thanks to a cheap valuation, improving fundamentals and insider buying. The broader market may pull back in the coming weeks or months, but Noble Corp and the energy space have a bright future.
Back in January, Noble beat earnings estimates, but issued disappointing guidance for the first half of the year. However in April, Noble's earnings and guidance was encouraging. Noble Corp reported 99 cents per share easily beat analyst by 28 cents. The better than expected earnings were due to higher margins and a market that isn't nearly as weak as some feared. The offshore drills with the modern rigs reported strong profits. Other rigs without new contracts are already turning into higher customer inquiries. In addition, the strong Gulf of Mexico rig auction back in March was suggestive of a strong drilling market in the future. Companies don't spend $870 million on leases for 320 tracts without planning on drilling on those sites.
For 2014, capital expenditures are coming in at $1.4 billion for new builds and $2.6 in total capital expenditures. This number will drop dramatically in 2015 as the new build program comes to an end. Only $510 million is expected to be spent on new builds in 2015 which will free up a great deal of free cash flow. As a result, the CEO is expecting strong free cash flow in 2015 to help further bolster the dividend which is already high and repurchase more shares to boost earnings going forward.
Besides the improving fundamentals, the valuation for Noble Corp looks very attractive. Currently, the stock trades for 9 times earnings, 8 times 2015 earnings, and 1.5 times sales. The stock is an excellent income idea with a dividend yield of 4.8%. Recent insider buying lends support to the thesis that the stock is attractive. In the short term if the broader market comes under pressure, Noble Corp and other stocks may come under pressure as well, but longer term Noble Corp could be a real winner.