JP Morgan just began coverage of this oil drilling company with an “overweight” rating.
Rowan Drilling (RDC)
from PAD System Report
While we look forward to the day when humanity is released from its dependence on fossil fuels, that day is not yet here. The world will still be using lots of oil and gas for the at least the next 3-5 years, and Rowan Drilling (RDC), a drilling services firm, helps find new supplies.
What makes this compelling, though, is its current valuation. Rowan is one of the few Value Line stocks which meets all the PAD criteria for purchase at its current price. The low end of Rowan’s appreciation potential is 45, year-ahead performance is an above average “2”, and financial strength is a minimally acceptable “B”.
Earnings projected to 2018-2020 are $4.65, about double the average earnings for 2014-16. As a bonus, the stock has a recently reinstated dividend.
Rowan’s price is so cheap because the price of oil has collapsed. Rowan’s revenues and profits, which respond to oil price changes with a lag, will probably be lower in 2016 than in 2015. The stock market has punished the stock, driving it down to a current p/e less than half the market multiple. The stock also sells for far less than its reported book value of $37 a share.
The current price is a bargain, unless the price of oil collapses even further. We think this is unlikely, and the oil market has already shown signs of stabilizing. Supplies from Saudi Arabia and US frackers could easily keep oil prices in the $50-$60 a barrel range for some time, but oil exploration will not stop, and Rowan can grow its earnings in this environment.
Subscribers intending to buy Rowan must realize that this is a risky stock, with a beta of 1.35 and a minimum financial strength rating. The overall stock market is expensive, and could sell off at any time, which could drag Rowan even lower.
Daniel A. Seiver, PAD System Report, www.padsystemreport.com, Dept of Finance, S.D.S.U, San Diego, CA 92181, May 31, 2015