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Is Diamond Offshore a Suitable Stock for Value Investors?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Diamond Offshore Drilling, Inc. DO stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Diamond Offshore has a trailing twelve months PE ratio of 8.24, as you can see in the chart below:



This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.26. If we focus on the long-term PE trend, Diamond Offshore’s current PE level puts it below its midpoint over the past five years. Moreover, the current level is fairly below the highs for this stock over the past five years, suggesting it might be a good entry point.



Further, the stock’s PE also compares highly favorably with the Zacks classified Oil & Gas Drilling industry’s trailing twelve months PE ratio, which stands at 49.48. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.


 
We should also point out that Diamond Offshore has a forward PE ratio (price relative to this year’s earnings) of 13.68, so it is fair to expect an increase in the company’s share price in the near future.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Diamond Offshore has a P/S ratio of about 0.96. This is considerably lower than the S&P 500 average, which comes in at 3.11 right now.




If anything, DO is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, Diamond Offshore currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes Diamond Offshore a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the Price/book (P/B) ratio for Diamond Offshore is 0.42, a level that is lower than the industry average of 0.50. The Price to Book ratio or P/B is calculated as market capitalization divided by its book value. Clearly, DO is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Diamond Offshore might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘B’ and a Momentum score of ‘B’. This gives DO a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best. The current year has seen two upward estimate revision in the past thirty days compared to two downward, while the next year estimate has seen one upward and two downward revisions in the same time frame.

As a result, the current year consensus estimate has increased by 1.3% in the past one month, while the next year estimate has inched lower by 66.7%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Diamond Offshore Drilling, Inc. Price and Consensus

This mixed trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.

Bottom Line

Diamond Offshore is an inspired choice for value investors, as it is hard to beat its good lineup of statistics on this front. Moreover, a strong industry rank (Top 44% out of more than 250 industries) further supports the growth potential of the stock. However, with a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Oil & Gas Drilling industry has underperformed the broader market, as you can see below:

 



So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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