Pride and Joy

• Posted by Adam Warner
• on March 9th, 2010

This from Jim Strugger at MKM Partners.

Pride International (PDE, Buy, $29.72, $40 PT, Matt Conlan, 2010 Focus List Member) trades at a 26% discount to our $40 per share liquidation value and is also our top takeover candidate among the offshore drillers. As a result, we expect the stock to move higher because of either an event or steady appreciation of the undervalued shares. Upside directional exposure can be attained via July 32.5/37.5 call spreads offered at $1.25 to make a maximum of $3.75 with PDE 37.50 or above at expiration.

….The recent correction in PDE, driven by    higher-than-expected    4Q shipyard costs and a resulting earnings miss, has driven the shares to a 26% discount to our $40 per share liquidation value. Relative to the Oil Services HOLDRS Trust (OIH, $126.72)    the    stock    has underperformed by a substantial 13.6% since the beginning of the year. Our 12-month target price of $40 represents a 7.3x multiple of estimated 2011 EBITDA versus an average multiple of 6.9x for other deepwater drillers, a premium 2011 multiple that we believe is justified, given the scheduled 2011-2012 growth in the company’s fleet that should drive above-average profit and cash flow growth in 2012 versus 2011.

I know not of this EBITDA you speak of, but I can upload a chart. And look at some volatility too, and July volatility is low end here at about 37. Though like everything else, it’s a premium to stock volatility. But all the more argument for using spreads. It’s a nice risk/reward shot if you like the idea.

 

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