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  • petroglyph56 petroglyph56 Apr 17, 2010 3:01 PM Flag

    Earnings Estimate

    'Prior to the late 2008 dive, PE was historically above 15. "

    While it is true that at times the PE has been high, it's a generalization that obscures more than it reveals to say the PE was "historically above 15".

    The sector cycles in big peaks and troughs. Earnings and multiples tend to make a big "X", during the up cycle when EPS growth is projected, the earning column goes up and to the right. What people miss is the inexorability with which PEs march down and to the right. They see the mid-term growth and wonder why it doesn't get a higher multiple, instead of a shrinking PE.

    Back in '06 we were 60 or 70 cents a quarter and the PE ranged from 20 down to 14 as the NE EPS ship started to come in.

    The '07 earnings saw a jump from .74 to a 1.29, but the PE kept trending down despite still rapidly-growing EPS.

    First half of 08 eps still climbing, but the PE now camped out around 9 or 10 till the Great Recession wipe-out led to a general market route, forced liquidations and PEs that I never expected to see in my lifetime. This interrupted the usual cycle.

    Despite the distortions of the financial collapse, 09 brought what you tend to see in the cyclicals, max EPS with min PEs, the 6s and 7s you mention. Even if the broader market didn't collapse we probably had a date with lousy multiple as the cycle spurred rig building, bring on fears that the cycle had built up to another bust. That little trip to $20 was just bad luck extraneous to the sector.

    I think what may emerge is sort of a slower growth state. Not ripping EPS growth like 05-08, but not a collapse either. This is a little unusual, as things usually stair-step up or slide down. It will help that NE is synthetically boosting it's EPS growth via buybacks of roughly 1% a quarter. If this scenario unfolds, we might see a multiple in the 9-12 range. But that little projection is worth all you paid for it.

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    • Thanks for your reply. I appreciate you sharing your insight & perspective. How long have you been following NE? Do you tend to trade it or keep it for awhile? Thanks!

      • 1 Reply to barber4y2
      • I have been investing in NE since early 07, but have been in other drilling names, such as R&B Falcon and RIG, further back in time.

        I tend to have a long term hold rather than trade perspective, but this long-lasting $40-45 channel for NE has had me using puts and calls at the top and bottom margins, so occasionally I get put (like this month) and occasionally I get called away. But my intention is to stay long, and I have some DITM LEAPs for NE held toward that end.

        Best luck.

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