I always experience a slight tremor of panic when I read that one of my holdings has been downgraded. What if there is some important negative news that affects the value of my stock? So when Atwood Oceanics
S&P downgraded Atwood from a hold to a sell based on valuation, saying, "... with the shares up 28% since the end of August ... On NAV model and relative metrics, we cut our target price by $2 to $29." [Emphasis added.]
The key word is "relative," because it means S&P is valuing Atwood against other drilling companies such as Noble
If S&P is looking at valuation, it should consider the absolute case. At today's price near $36, Atwood trades at a price-to-earnings ratio of under 10. It grew revenues by more than 11% in the most recent quarter, and its five-year expected PEG ratio of 0.64 is well under 1. If anything, Atwood continues to look like a buy to me.
The other downgrade was a reiteration by Goldman Sachs of its sell recommendation and $23 price target. The Goldman opinion came after Atwood announced that it ordered two new drilling platforms for a total price of $380 million. Goldman had no quibble with the business case for the rigs, saying, "We do not view today's announcement as negative in the sense that it appears to offer a 13% IRR based on current dayrates of $150k."
What is the problem, then? Goldman considers it risky that Atwood does not have signed contracts for the new drilling platforms, and that management is about to order even more rigs. But Atwood has two years to sign up customers before the rigs are delivered, and its current order backlog of $1.35 billion just happens to account for two years of business.
Atwood does have the option to buy more rigs, which is something investors need to watch carefully (especially if additional rigs are also built on spec), but let's keep in mind for now that it is just an option.
After studying both downgrades, I don't think that they uncover any new, material concerns, and I remain comfortable owning Atwood stock. Atwood is currently rated a top five stars by our community of investors. Head over to the company's Motley Fool CAPS page to learn more.
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Fool contributor Tomasz Johannsen owns shares of Atwood Oceanics and Noble. Atwood Oceanics is a Motley Fool Stock Advisor pick. The Fool owns shares of Noble and Transocean. 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.