Hidden Riches in Driller Rowan

With Enron and other potential Enrons spooking Wall Street, Bob Olstein of the Olstein Financial Alert Fund is looking behind the numbers--not to uncover more accounting fiascoes but to discover undervalued gems. He may have found one in Rowan (RDC ), a major global contract oil and gas driller and maker of offshore drilling rigs and heavy gear. Rowan's stock has skidded from 33 a share on May 21, 2001, to 17 on Feb. 6 in the aftermath of declining energy prices and the Enron debacle. Olstein says that based on the replacement value of its rigs alone, the stock is worth 25. But based on its cash flow, and projected earnings of $2 in 2004, it's worth 35--or a p-e of 17.5. Rowan earned 80 cents a share in 2001. The consensus forecast for 2002 is 9 cents a share because of falling gas prices, and then $1.16 in 2003 as the economy rebounds and energy prices bounce back. But, says Olstein, earnings are understated. Rowan sells about half of the specialty rigs it manufactures to its offshore drilling division at cost, with no markup and no profit. Sure, the company does realize a profit as the rig is put into use, but that comes about through charging off less depreciation on the lower base price of the rig and is spread over the life of the rig, usually 10 years or more. Not only are its earnings understated, but its assets are also understated since they are carried on its books at manufacturing cost. Rowan also has $80 million in deferred one-time income from a lawsuit it won against Amoco Exploration in mid-November last year.

In 2001, Olstein Financial Alert Fund gained 17.25% vs. a loss of 11.82% by the S&P 500.

By Gene G. Marcial

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