I am taking my money out of Aban Loyd. I sold the stock at Rs 3900. Consensus EPS estimate for this stock is Rs 400 for FY09 and Rs 500 for FY10.
I am sure consensus is overestimating EPS because: (a) This company has extremely poor disclosure, nobody knows the numbers for its Singapore subsidiary. Costs for drillers are rising fast - there is a shortage of manpower. I dont think analysts are capturing that properly. (b) I am sure some of the new rigs are going to be delayed, as they have been over the last few years. So revenue and EPS is going to be pushed out. (c) Not sure whether people are capturing drydocking days properly.
But that doesnt imply that I am bearish on the stock. I think this sector has no problem till oil remains above $80. I simply dont see why I should buy Aban at 10x next year PE when Transocean is available at 11x PE - when Transocean has much bigger deep water fleet that is contracted out (in some cases) till 2016 and a much better disclosure.
The entire offshore drilling sector is getting valued at low multiples, when the visibility into the earnings of companies (esp RIG) is getting longer and longer. These are deep cyclicals, and the market is valuing them like that. But this cycle is just getting longer and longer, as oil hits new highs.
This creates one of the best opportunites to trade. Market is valuing Aban like a deep cyclical while fundamentals are strong for the next 2-3 years. Aban is an extremely volatile stock and gets hammered when market falls. So, there is lots of money to be made with this stock if one trades properly. That is what I have decided I will do with this one. I am going to use this as a test case to figure out how one can trade stocks, as I feel very comfortable with the underlying fundamentals.