NEW YORK (TheStreet) -- Diamond Offshore Drilling (DO - Get Report)  stock is down 3.90% to $35.39 in early morning trading Wednesday after BMO Capital Markets initiated coverage with an "underperform" rating and a $29 price target. 

"We recognize that being negative offshore has been a consensus view; however, we think the duration of the downturn is not yet fully reflected in the stocks," analysts noted. 

BMO thinks that a material portion of Diamond Offshore's fleet will be secularly impaired due a likely decline of floater demand by 10%-15% and a cumulative supply increase of 26% between now and 2018. 

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Diamond Offshore reported earnings of 72 cents per share for its 2014 fourth quarter and $3.14 per share for its 2014 fiscal year. Diamond Offshore reported revenue of $2.81 billion in 2014.

BMO expects 2015 fiscal year earnings estimates to be 6% lower than consensus at $2.40 per share, and 2016 fiscal year earnings estimates to be 27% below consensus at 73 cents per share. The firm also anticipates 2015 and 2016 fiscal year revenue to be $2.78 billion and $2.60 billion, respectively. 

"We see a low probability that even half the stacked rigs will ever return to work," BMO noted.

Separately, TheStreet Ratings team rates DIAMOND OFFSHRE DRILLING INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate DIAMOND OFFSHRE DRILLING INC (DO) a HOLD. The primary factors that have impacted our rating are mixed some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its increase in net income, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including disappointing return on equity, a generally disappointing performance in the stock itself and feeble growth in the company's earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the Energy Equipment & Services industry average, but is less than that of the S&P 500. The net income increased by 6.7% when compared to the same quarter one year prior, going from $92.62 million to $98.84 million.
  • 46.79% is the gross profit margin for DIAMOND OFFSHRE DRILLING INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 14.63% significantly outperformed against the industry average.
  • DO, with its decline in revenue, underperformed when compared the industry average of 11.1%. Since the same quarter one year prior, revenues slightly dropped by 3.7%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • DO's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 26.17%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. In comparison to the other companies in the Energy Equipment & Services industry and the overall market, DIAMOND OFFSHRE DRILLING INC's return on equity is significantly below that of the industry average and is below that of the S&P 500.
  • You can view the full analysis from the report here: DO Ratings Report