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Spotlight On: Ensco International Inc…

Spotlight On: Ensco International Inc. (ESV)

Company Profile: From Reuters – “ENSCO International Incorporated is an international offshore contract drilling company. The Company engages in the drilling of offshore oil and gas wells in domestic and international markets by providing its drilling rigs and crews under contracts with major international, government-owned, and independent oil and gas companies. As of February 17, 2009, the Company’s offshore rig fleet included 43 jackup rigs, two ultra-deepwater semisubmersible rigs and one barge rig. In addition, it has six ultra-deepwater semisubmersible rigs under construction. The Company is a provider of offshore contract drilling services to the international oil and gas industry. Its operations are concentrated in the geographic regions of Asia Pacific (which includes Asia, the Middle East, Australia and New Zealand), Europe/Africa, and North and South America.

Of the Company’s 43 jackup rigs, 19 are located in the Asia Pacific region, 10 are located in the Europe/Africa region and 14 are located in the North and South America region. The Company’s business consists of four operating segments: Deepwater, Asia Pacific, Europe/Africa and North and South America. Each of its four operating segments provide one service, contract drilling. The Company has contracted Keppel FELS Limited (KFELS) to construct seven ultra-deepwater semisubmersible rigs (the ENSCO 8500 Series).

The Company provides drilling services on a day rate contract basis. Under day rate contracts, it provides the drilling rig and rig crews, and receives a fixed amount per day for drilling the well. Its customers bear substantially all of the ancillary costs of constructing the well and supporting drilling operations. In addition, its customers may pay all or a portion of the cost of moving the Company’s equipment and personnel to and from the well site. The Company does not provide turnkey or other risk-based drilling services.”

Analysis: The following schedules present a comparative ratio analysis of Ensco International and firms operating in the same industry. Four categories of ratios (profitability, liquidity, debt management and asset management) have been used to compare Ensco with that of the industry. ESV has been compared to the industry median for the oil well services and equipment industry.

Ensco International Inc.

Ratio Analysis and Comparison to Industry

	ESV (TTM)	Industry Median (TTM)	Variance
PROFITABILITY
Gross Profit	67.40%	34.8%	32.60
Operating Margin	56.50%	8.40%	48.10
Net Profit Margin	44.00%	4.90%	39.10
Return on Equity	21.00%	11.50%	9.50

Return on Assets

16.90%

2.50%

14.40

    

LIQUIDITY
Quick Ratio	3.40	1.50	1.90
Current Ratio	3.40	2.00	1.40
Payout Ratio	1.40	0.00	1.40
Times Interest Earned	60.60	4.30	56.30

DEBT MANAGEMENT
Total Liabilities to Total Assets	19.30	50.40	(31.10)
Long-Term Debt to Equity	5.20	30.40	(25.20)
Long-Term Debt to Capital	4.90	25.10	(20.20)

ASSET MANAGEMENT
Receivables Turnover	4.60	5.20	(0.60)
Asset Turnover	0.40	0.60	(0.20)
Inventory Turns	n/a	9.50	n/a

The profitability ratios measure management’s effectiveness in overseeing the business’s resources. Compared to the industry median, ESV is more effective than the industry in producing earnings from its assets.

The liquidity ratios give an indication of ESV’s ability to meet its current obligations related to interest bearing debt. As shown in the comparative ratio analysis, because of the company’s high profitability and low level of debt, it has a more than adequate cushion to meet its debt obligations. In fact, these ratios indicate that ESV may have the ability to increase its debt load.

The debt management ratios indicate the extent to which ESV’s assets are funded by debt. As shown in the schedule, ESV has very little debt and a much smaller debt to equity ratio than the industry median. Taken together, ESV is less leveraged than the industry.

The asset management ratios indicate that ESV manages its assets approximately the same as its industry group.

Summary: Based on this analysis of Ensco International, the business appears to be in a strong financial position. During the past five years, revenues have increased from $731.3 million (FYE 12/2004) to $2,278.8 million (TTM) and net income has increased from $93.0 million (FYE 12/2004) to $1,003.1 million (TTM). The company’s equity position has increased, as well. in addition, compared to the industry, ESV has more liquidity, less leverage, and operates more profitably. 

Conclusion: We see price appreciation potential to $70.00 per share.

Disclosure: Author has a long position in ESV.

Spotlight On: Major Appliances and Tools

Spotlight On: Major Appliances and Tools

The global economic recession during 2008 and 2009 caused the major appliance and tool sectors to experience significant macroeconomic challenges including instability in the financial markets. These challenges have impacted the global economy, the capital markets, operating costs throughout the sector and global demand for products. The results of these challenges include higher material and oil-related costs, liquidity strains on the supply chain, decreased consumer confidence and reduced consumer discretionary spending. We expect these conditions to continue in the foreseeable future. key factors include:

• The impact of the global economic recession is forecast to cause global shipments to fall by 12.2% in 2009 as compared to 2008.
• Europe is projected to see the steepest declines in appliance shipments while Latin America, Africa and some parts of Asia are forecast to outperform the global average.
• Despite the downtown, manufactures continue to turn out innovations in an effort to differentiate themselves from the competition.

In the US, demand for hand and power tools is expected to increase through 2012. If the US construction industry recovers by 2012, creating demand from the professional end of the market. While we wait for the recovery, the DIY market and remodeling efforts maintain a base level of support for this sector.

We limited our analysis in this sector to companies with a market capitalization of at least $500 million. This provided a short list of nine companies including market leaders Whirlpool (WHR), Helen of Troy (HELE), Snap-On Inc.(SNA), Black & Decker (BDK) and Stanley Works (SWK).

We particularly like Black & Decker. From Reuters:

“The Black and Decker Corporation, incorporated in 1910, is a global
manufacturer and marketer of power tools and accessories, hardware and
home improvement products, and technology-based fastening systems. The
Company is a global supplier of engineered fastening and assembly
systems. The Company operates in three operating segments: power tools
and accessories, including consumer and industrial power tools and
accessories, lawn and garden products, electric cleaning, automotive,
lighting, and household products, and product service; hardware and
home improvement, including security hardware and plumbing products;
and fastening and assembly systems.”

Key Financial Ratios and Statistics

FYE: 12/31

Profitability	2008	Leverage	2008
Net Inc/Comm Equity	6.63	Total Liab/Total Assets	0.78
Net Inc/Total Assets	0.06	Total Liab/Inv Cap	1.12
Net Inc/Inv Cap	0.08	Total Liab/Comm Equity	91.61
Pretax Inc/Net Sales	0.06	Interest Coverage Ratio	4.62
Net Inc/Net Sales	0.05	Curr Debt/Equity	0.07
Cash Flow/Net Sales	0.07	LTD/Equity	1.28
SG&A/NetSales	0.25	Total Debt/Equity	1.36
Asset Utilization		Liquidity
Net Receivables Turnover	5.98	Quick Ratio	1.06
Inventory Turnover	3.77	Current Ratio	1.75
Inventory Day Sales	0.01	Net Rec/Curr Assets	0.36
Net Sales/Work Cap	5.44	Inv/Curr Assets	0.39
Net Sales/PP&E	11.53

As we can see from the table shown above, BDK compares well with its industry peers in the areas of profitability and liquidity. On the other hand, the company performs poorly in the areas of leverage and asset utilization when compared with industry peers.

Earnings per share projections for FYE 2009 range from $1.52 – $2.00 and average $1.786. For FYE 2010, EPS ranges from $1.75 – $2.60 and average $2.282. EPS for the trailing twelve months is $2.91. Though earnings are forecast to be down for the current year and next, analyst projects have been badly off the mark.

Quarterly Earnings Surprise History Fiscal Quarter End Date Reported Earnings Per Share* Consensus EPS* Forecast % Surprise Jun 2009 07/24/2009 0.63 0.368 71.20 Mar 2009 04/23/2009 0.22 0.081 171.60 Dec 2008 01/29/2009 0.97 0.671 44.56 Sep 2008 10/23/2008 1.63 1.291 26.26

We have a target value for BDK at $52.00.

Disclaimer: Author has no position in BDK, WHR, SNA, HELE or SWK.

Spotlight On: The Other Israel

Spotlight On: The Other Israel

Do you picture Israelis spending their day scurrying from bomb shelter to bomb shelter much like Londoners during the blitz? Does your image of Israel include soldiers patrolling the streets, buses being blown-up and men in long black coats rioting? If these images inform your opinion of Israel, then media distortions are keeping you from some exciting investment opportunities.

Tel Aviv is not Bagdad. Each morning in Israel, children go off to school and people go to work. Leisure time is spent in restaurants, cafes, movie theaters and malls. During the current financial crises, the Israeli economy suffered less than most developed countries and a recovery is already under way.

With the exception of Canada, more Israeli companies trade their shares on the various New York exchanges than any other country in the world.In fact, more than 100 companies trade in New York. The companies trade range from world class industry leaders such as Teva Pharmaceuticals (TEVA) and Check Point Software Technologies (CHKP) to young, dynamic companies.  Israeli companies are particularly active in technology, biotechnology, defense and telecom. These companies are known for developing cutting edge technology solutions in their particular industries. The internet would not exist in its current form with Israeli innovations such as instant messaging and file compression. 

One of the companies we follow is 012 Smile Communications (SMLC). 

From Reuters:

“012 Smile.Communications Ltd., incorporated in 1999, is a communication services provider in Israel, offering a range of broadband and traditional voice services. The Company operates in two segments: broadband and traditional voice services. The Company’s broadband services include broadband Internet access with a suite of value-added services, specialized data services and server hosting, as well as services, such as local telephony via voice over broadband (VoB) and a wireless fidelity (WiFi) network of hotspots across Israel. Its traditional voice services include outgoing and incoming international telephony, hubbing, roaming and signaling and calling card services. The Company offers its services to residential and business customers, as well as to Israeli cellular operators and international communication services providers, or carriers through its integrated multipurpose network, which allows the Company to provide services to almost all of the homes and businesses in Israel.”

The company is that rare breed of young tech companies, it is profitable. EPS for FY08 are $0.50; TTM EPS is $1.18. Consensus earning for FY09 range from $1.04 to $1.43 with an average of $1.18. Estimated earnings for FY10 range from $1.08 to $1.36 and average $1.20. Measured Approach estimates FY09 earnings to be $0.76. We place more importance to free cash flow than on EPS. In FY08, FCF came in at $1.58. FCF for the trailing twelve months is up to $2.07. Again, Measured Approach sees a short term decline in FCF to $1.70.

At current prices, the company trades at a modest PE of 9.28x and a PSR of 0.90. ROI for the TTM is 9.67% and Return on Equity is 15.23%. Sales and earnings are growing and operating margins continue to expand each year. Though debt levels may be a little higher than we would like, they are generally better than the industry’s (depending on which metric you use). More importantly, debt ratios improve every year. In addition, the receivables to sales ratio has not gotten out of hand and has remained stable as the company grew.

Our near term price target for SMLC is $16.59 and longer term $25.51. Israeli companies offer tremendous potential for every type of investor and something for gamblers and speculators too.

Disclaimer: Author is long CHKP and SMLC.