Comparing multiples with peers
Ensco’s (ESV) current valuation multiple as of October 29 is 5.92. This is higher than multiples for Rowan Companies (RDC) and Ocean Rig (ORIG), which are trading at 5.4x and 4.8x, respectively. Diamond Offshore (DO), Noble (NE), Pacific Drilling (PACD), Seadrill (SDRL), and Transocean (RIG) are trading at EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples of 6.99x, 5.90x, 6.93x, 6.83x, and 6.95x, respectively.
Offshore drilling (OIH) (IYE) companies are best valued and compared using EV/EBITDA. A company’s forward EV/EBITDA ratio reflects what investors are willing to pay for the next four quarters of estimated EBITDA. For the offshore drilling industry, we believe that EV/EBITDA reflects the perceived riskiness of investing in offshore drilling companies as well as investors’ expectations for the industry’s outlook.
Ensco’s valuation multiple stands on the lower side despite comparatively lower risks the company is facing. The company is one of the least leveraged companies. It does not have any debt repayment concerns until 2019. The company also doesn’t face any immediate liquidity concerns. Plus, it has a decent backlog.
On the negative side, the company has a lower EBITDA margin than most of its peers. Investors should keep in mind these valuations are based on analysts’ EBITDA estimates, and they can change over time. Analysts’ estimate for Ensco’s 2016 EBITDA is $1,524 million, and that for 2017 is $1,184 million against the actual last-four-quarter EBITDA of $1,882 million.
Wall Street analyst target price
Wall Street analysts have a 12-month target price of $16.3 on the company compared to the current price of $18.25 on November 4. A total of 34 analysts gave recommendations on this stock. Only 11% of the analysts recommend a “buy,” 62% recommend a “hold,” and 27% recommend a “sell,” according to the Bloomberg consensus.