Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Friday, February 15, 2008 8:21 AM

On this day in history in1898 the battleship, Maine, exploded in Havana harbor and triggered a war with Spain. It also unleashed a virulent plague on the American landscape called "Yellow Journalism" so called because the competing Hearst and Pulitzer published newspapers were yellowish colored. The Maine and the war are part of history, yellow journalism has flourished and has gone on to heights unimagined by the guys that started it. In 1946, smart guys at U.Penn built "ENIAC", electronic numerical integrator and computer, which created a new industry. I think the structured finance guys that used the modified binominal expansion technique really should have used a better machine.

There is a report this morning that a company called Fortune Super Equity Management has made a premium bid for a jack up rig company named Scorpion Offshore. It made me revisit Rowan (RDC) a mostly shallow water offshore jack up company (it also has land rigs and a manufacturing division.) The offshore Gulf of Mexico market has been in a slump for a lot of reasons and the companies that work there have seen their stocks go down. This bid values high end jack ups at around $230 milllion per. There are a lot of types of rigs, but applying a price per rig like this to RDC's fleet, which is similar to or better the Scorpion's, leads me to conclude RDC is undervalued. The stock is at $37, down from $46 and trades for 8X the consensus estimate for 2008 of $4.67. The company has only about 15% debt and generates a good amount of free cash flow. I don't own it now but have several times over the last few years. I figure it's worth between $45 and $50.

My favorite in this group is Transocean. The company dominates the deepwater market with a bunch of rigs that can drill in 10,000 feet of water and can go to a depth of 35,000 feet (how do they do that?) The contracts tend to be multi year which makes earnings and cash flow predictable and visible. 2009 estimates are above $17 a share and the stock is at $130, very cheap in my view. I own it and will think about repurchasing RDC.

I was thinking about the tax rebate of some $150 billion that will be going out before too long (I didn't start to think about this until after Valentines dinner, thank you!) Every little bit helps, but this won't be a big deal. It's great politics and I love the political arena. but I don't think this will help the economy much since windfalls tend to be saved or used to pay down debt. The American consumer is too smart to spend money that is not permanent. Yes, the consumer has gorged on debt, and unwisely so, but we thought our homes would hold value or go up forever. This money, in my opinion, has already been spent. The second observation is the government will spend over $3 trillion, yes trillion, this year. But when times toughen, the government says lets's give money back to the consumer. They know best how to spend it. We spend 3 trillion, but the consumer can right the ship with only 150 billion ! This free market capitalist wishes the government would listen to itself.