On the surface, Diamond Offshore Drilling
The strength in the stock is easy to see after reading last night's earnings announcement. The big news was not that quarterly revenues increased 13% and that a year-earlier loss was turned into a $0.02 profit. With the stock trading at $34.75 a share, two cents in quarterly earnings is not propping it up.
High oil prices (and a little hurricane damage to boot) are finally moving drilling rig day rates. Third-quarter day rates for 2004 were actually below 2003 rates except for jack-up rigs (31% of the fleet) -- yet the company made money because of higher utilization rates. Now the company says that "substantially higher" day rates are being booked for the fourth quarter and 2005.
The news is so good that three brokerage firms raised their rating on the stock. But the stock is still not a bargain. Analysts were estimating the company would earn $0.05 a share this year and $0.90 a share next year. Although estimates will rise after today's announcement, the company will still probably be trading for 30 times 2005 estimates -- leaving little room for any disappointments.
Those wanting to participate in this industry without paying a high price to earnings for Diamond or its larger competitor, Transocean
For those wanting to have exposure to Diamond, consider holding company Loews
While the news is certainly positive for Diamond's upcoming quarters, this is not a gem of an investment. Drilling is a cyclical, capital-intensive industry that has wide swings of fortune and great operating risks. Note, too, that the brokerage firms are warming up to the company after it has risen 80% over the last 52 weeks. Diamond is doing well, but it is far from a bargain.
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.