Is Transocean LTD (RIG) As Good A Buy As Bankers Say?

Offshore driller Transocean LTD (NYSE:RIG) has not been earning much money over the last year compared to its market capitalization of $17 billion, but the company experienced a decent Q1 and Wall Street analysts are highly optimistic about its future. Consensus forecasts predict that Transocean LTD (NYSE:RIG) will earn over $6 per share in 2014, making for a forward earnings multiple of only 8- clearly in value territory. With earnings expected to increase further beyond that point, the five-year PEG ratio is 0.4; again, at least on the surface this is an appealing value metric.

Contract drilling revenues rose by 7% last quarter compared to the first quarter of 2012. Pretax income was about flat if we add back an impairment charge to last year’s figures and if we also ignore some discontinued operations from Q1 of 2012 which contributed net losses to Transocean LTD (NYSE:RIG). Earnings per share were 88 cents, so the forward earnings estimates represent a significant projected increase over what the company has been doing if we annualize last quarter’s numbers. Cash flow from operations was fairly low as the company made significant investments in working capital.

Transocean LTD (NYSE:RIG) recently reinstated its dividend, with a plan to make quarterly payments of 56 cents per share. At current prices that comes out to an annual yield of 4.7%, which we think does make it an intriguing opportunity for income investors. Offshore oil, particularly in the deepwater and ultra-deepwater zones where Transocean LTD (NYSE:RIG) might have more of an advantage over competitors, is particularly expensive to drill and so we would be skeptical that the company will hit analyst targets without a rise in oil prices. Still, an improvement to $4 in EPS does not seem unreasonable and would make for a P/E of 12, essentially in value territory.

We track quarterly 13F filings from hundreds of hedge funds and other notable investors, using the included information to help us develop investment strategies. We have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). Billionaire Carl Icahn has taken a large stake in Transocean LTD (NYSE:RIG), and has been pushing for the company to pay even higher dividends (see Icahn’s stock picks). Omega Advisors, managed by billionaire Leon Cooperman, reported a position of 3.2 million shares as of the end of March (find Cooperman’s favorite stocks).