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From Gross to Net at Transocean

Margins matter. The more Transocean (NYSE: RIG  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Transocean's competitive position could be.

Here's the current margin snapshot for Transocean and some of its sector and industry peers and direct competitors.


TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Transocean 50.8% 34.2% 26.5%
 Diamond Offshore Drilling (NYSE: DO  ) 58.1% 44.4% 29.3%
 Nabors Industries (NYSE: NBR  ) 43.6% 10.0% (0.1%)
 Patterson-UTI Energy (Nasdaq: PTEN  ) 36.7% (0.2%) (0.3%)

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Transocean has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Transocean over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.
(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.
(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 57.7% and averaged 50.9%. Operating margin peaked at 46.3% and averaged 37.6%. Net margin peaked at 48.9% and averaged 33.7%.
  • TTM gross margin is 50.8%, 10 basis points worse than the five-year average. TTM operating margin is 34.2%, 340 basis points worse than the five-year average. TTM net margin is 26.5%, 720 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, Transocean has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market.  Got an opinion on the margins at Transocean? Let us know in the comments below.

Seth Jayson owned shares of the following at the time of publication: Transocean. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 28, 2010, at 10:47 AM, moblackty wrote:

    Nice article but a little to short on reality I think.

    Where is the offshore drilling ban factored in that shut down offshore drilling, minor detail? where is the insurance money from the rig loss to BP? Was it invested in new rig building or spent on PR? Over all a C- on reporting

  • Report this Comment On October 28, 2010, at 11:31 AM, MKArch wrote:


    Love the slew of practical investment analysis focused articles I've come across from you over the last couple of days. It seems like it is a concerted effort on your part. I for one thank you for it.


  • Report this Comment On October 28, 2010, at 1:00 PM, spokanimal wrote:

    The top graph comparing margins to peers like nabors and diamond was useful. The bottom graph is nice but needs to be considered in the context of how oil prices, rig lease rates and rig utilization have fared overall.

    Over the 5 years shown, oil prices have soared over $140/bbl, plummeted into the mid $30s, then recovered to $80 in an environment of bloated inventories that all affect exploration budgets.

    So, while I appreciate your analysis, it's only the tip of the iceberg in terms of what your readers need to consider to invest this sector intelligently...

    ... eg: if you can't know a lot, it's better to know nothing and buy a mutual fund than it is to know just enough to be dangerous to yourself.


  • Report this Comment On October 28, 2010, at 9:40 PM, TimsRedbeard wrote:

    The off shore drilling ban in the gulf of Mexico was lifted. See link below and a portion of the article. This will help the drilling rigs.

    Redbeard in Florida

    The federal government has decided to lift its deepwater drilling moratorium in the Gulf of Mexico (“GoM”), weeks ahead of its scheduled late-November expiration. The Interior Department, which oversees offshore drilling, stressed that the newly issued technological and safety reforms for offshore drillers – that is expected to cut the risk of another disastrous blowout and oil spill – was the main reason for the early termination of the freeze.

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Transocean CAPS Rating: ****