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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

Diamond Offshore

December 17th 2010 Diamond Offshore
NYSE Symbol: DO
Industry: Oil driller
Price as of 12/17: $64

The Wallstreet analysts are in a jolly mood this holiday season. JP Morgan, Barclays, Goldman Sachs, and Deutsche Bank all raised their S&P500 price targets for 2011. Deutsche Bank has the highest price target of 1550, a good 25% higher from present levels. That would be nice. A lot of sectors have performed great including commodities. However, the oil stocks have underperformed. The BP oil spill in the Gulf created a lot of havoc for everyone in the industry as the government initiated a moratorium on drilling in the Gulf. Since BP capped their spill, the sector has slowly improved but the moratorium has persisted and fears of more regulation coming down the pike have some investors spooked. Long term, unfortunately, we still need to find more oil. This week we'll feature a blue chip oil driller, Diamond Offshore. We featured a rival Noble Corp back in September, but the stock has continued to move sideways. However they did pay out a dividend. Diamond Offshore is a great dividend stock as well with a yield of over 5%. Short term, the oil drillers remain under pressure, but long term they are well positioned and the valuation is very compelling.

Back in October Diamond Offshore, the second-largest offshore drilling contractor, reported net income down 45% at $198.5 million, or $1.43 per share, compared with $364.1 million, or $2.62 per share, for the same quarter a year ago. The company's revenues for the quarter came in at $799 million, versus $908 million a year earlier before the moratorium. The moratorium has halted work on about three dozen drilling rigs, and new regulations significantly slowed down the permit application process for everyone else. Diamond Offshore moved a few of its deepwater rigs out of the Gulf to work on drilling operations in foreign waters. But other rigs were locked in contract disputes with well owners during the moratorium and were forced to undergo a lengthy certification process to comply with new drilling rules. However, the CEO anticipates most of these rigs will be employed during the fourth quarter. Despite the decline in Diamond's earnings, the company's board will again pay a special cash dividend of 75 cents per share with a regular dividend of 12.5 cents. The dividend amount reflects a continuation of their policy to pay a special cash dividend each quarter.

Diamond Offshore's earnings for the year are to come in around $6.60 a share which would equal their 2007 earnings. In 2008 and 2009 Diamond Offshore made over $9 a share in earnings. Diamond Offshore will not be making $9 a share in earnings next year, but over the coming years earnings should start to improve once again. Even with the reduced earnings estimates Diamond Offshore still trades for 10 times earnings, 2.6 times sales, and 2.3 times book value. Diamond Offshore will not go ex-dividend until the first week of February. But with a yield of 5% and the potential for earnings to move higher once again, Diamond Offshore remains an attractive stock for the long term.