Transocean: A Lot to Like

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It's usually a sign of underlying buying interest in a stock, when it gains in price on a day when the overall market is negative, suggests John Dobosz, editor of Forbes Dividend Investor.

That's what happened recently with Switzerland-based Transocean (RIG), the world's largest offshore contract driller for oil and gas wells.

There's a lot to like about Transocean these days. Last month, it struck a deal with Carl Icahn, who owns nearly 6% of the company, and was agitating for a number of changes.

He got another one of his people on the board of directors, and Transocean also cut the number of board seats from 14 to 11, giving existing members greater weight. Icahn also extracted a pledge that Transocean will boost profits by $800 million, through cost cutting, and increased efficiency.

Most significant for dividend investors is that Icahn succeeded in getting the company to agree to pay a $3 per share dividend next year, up 33.4% from the current $2.24 annual rate. Transocean will also explore spinning off some of its assets into a master limited partnership structure.

After taking a hit after the April 2010 explosion and spill, on its Deepwater Horizon rig at BP's Macondo Well in the Gulf of Mexico, earnings are back on the rise.

Analysts expect Transocean to earn $4.18 per share in 2013, up 5.5% from 2012. Revenue should be higher by 3.5% to $9.52 billion. Next year, earnings are forecast to grow 35%, with sales up 6.7%.

Current valuations make a good case for jumping into Transocean. Its average price-sales ratio, over the past five years, is 2.03, 6.4% higher than today's P/S multiple of 1.91. With $26.40 per share in expected sales this year, that average P/S implies a $53.60 stock price.

It trades at a 75% discount to its five-year average P/E ratio, but at 43.8 times trailing earnings, it's rather plump and reflects the effects of the spill costs.

Nonetheless, at 8.9 times next year's earnings, which are growing at better than a 30% clip, the stock is pretty cheap.

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