Transocean Is Upgraded to 'Buy'

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BOSTON (TheStreet) -- TheStreet.com's stock-rating model upgraded offshore oil and gas driller Transocean(RIG Quote) to "buy."

The numbers: Second-quarter net income fell 24% to $806 million and earnings per share dropped 25% to $2.49, hurt by a higher share count. Revenue declined 7% to $2.9 billion. Transocean's gross margin remained steady at 56%, but its operating margin declined from 44% to 42%. A quick ratio of 1.3 demonstrates adequate liquidity. A debt-to-equity ratio of 0.6 indicates reasonable leverage. We give Transocean a financial strength score of 7.9 out of 10, higher than the "buy"-list average of 7.

The stock: Transocean has advanced 95% this year, outpacing major U.S. indices. The stock trades at a trailing price-to-earnings ratio of 8, a discount to the market and oil and gas drilling peers. Transocean is also cheap, relative to its peer group, on the basis of projected earnings, book value and cash flow. But the stock is more expensive than peers on the basis of sales per share. Transocean doesn't pay dividends and has returned 34% over the past year and 153% over a five-year period.

The outlook: Transocean is scheduled to report its third-quarter results Nov. 4. Our model is optimistic about several other drillers, including Ensco International(ESV Quote) and Diamond Offshore Drilling(DO Quote), which are both rated "buy." Like Transocean, these companies are trading at a discount to the market and have achieved consistent growth. With crude oil rising to above $80 a barrel this week, investors are optimistic a rebound in the global economy will boost demand for energy.

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