It might be wise to diversify and include deep water drilling company.  Transocean Inc. (RIG) pops up in numerous screens and articles. Value Line describes Transocean as the world’s largest offshore drilling contractor, working in all the major offshore regions, including the Gulf of Mexico, the North Sea, the Middle East, and off the coasts of West Africa, the United Kingdom, Norway, Brazil, and Canada.  It specializes in technically demanding deep-water/harsh-environment drilling projects.

Here is a stock selection guide for Transocean.  Manifest Investing estimates a projected average return of 19.3%.  Morningstar rates Transocean 5-stars (undervalued) and calculates fair vale as $176 (current price is $133).  We should consider selling part of our position in HP and buying RIG.

SNHY has a global network with 53% of its sales overseas. It is not dependent on any one customer, with its largest customer accounting for 7% of revenues. Insiders hold hold 32% of the shares. If you listen to its last quarter earnings conference (found on the company website), you get a sense of a well managed company with a closely knit team.

Analysts predict 20% EPS growth. We assumed 18% growth in the stock selection guide and used conservative PEs. Manifest Investing rates the quality 79.9 and projected average return 19.9%. The PE to growth (PEG) ratio is approximately 1. With $149 million in revenue for the TTM, this company has room to grow. Propose we buy this company now.

• Link to the company website
• Link to stock section guide and data sheet

We purchased an initial position in SAP AG on June 13, 2007. Here is the stock selection guide we used for the purchase decision.

We purchased an initial position in Wells Fargo & Company on June 13, 2007.  This replaces Commerce Bancorp.  Here is the stock selection guide we used for the purchase decision.

We purchased an initial position in American International Group on June 13, 2007.  This replaces Capital One Financial in the financial sector of our portfolio.  Here is the stock selection guide we used for the purchase decision.

We purchased an initial position in Microsoft on June 13, 2007. Here is the stock selection guide we used for the purchase decision.

We purchased an initial position in Walgreens on November 22. Here is the stock selection guide we used for the purchase decision.

Maxim reported earnings for the fiscal year ending June 24, 2006. The company reported revenue growth of 11.2%. However, net income fell (-14.4%)and diluted EPS fell (14.9%) from $1.578 to $1.372. See Maxim’s press release. The expensing of stock based compensation contributed to the poor earnings.

Maxim and Linear Technologies (LLTC) are similar companies with different niches in the semiconducter industry. They had similar results this year, increased revenue growth but declining earnings. LLTC’s EPS did not decline as much as that of MXIM.

Should we sell MXIM? The short answer is no. The company’s fundamentals — the basis on which we buy or hold stocks — still look very good. On Friday, Maxim reported record-high quarterly revenue as bookings. The company has no long term debt. Net profit margins have remained strong. Value Line projects 20% sales growth and 15.5% earnings growth. The analysts consensus for 5-year earnings growth rate is 20%. Morningstar gives Maxim a 5-start rating (meaning it is priced well below fair value), a wide moat, and a stewardship grade of B. Manifest Investing rates its quality 69.

Whenever the earnings of a growth company falter, the price of the stock usually tumbles. Maxim’s stock price is near its three year low even though the company’s fundamentals and business model appear to be intact.

We currently hold 58 shares of Maxim valued at $2,090. It is 4.3% of our portfolio. Our average cost is $35.88 per share. The current share price is $27.94. We have a net loss of $462. (We also have a net loss for Intel, another semiconductor stock.) Revising the stock selection guide for a projected 15% EPS growth, projected average return is 21.5%. At his point, we probably have more to gain than lose by holding Maxim.

Prior Analysis from January 09, 2005

Maxim Integrated Products is one of two semiconductor manufacturers that appear to be timely purchases. The other is Linear Technologies (LLTC).

Growth. Although sales and earnings dropped slightly between 2001 to 2002, MXIM is a quality growth company. Over the past ten years, revenues and earnigns have grown at an annualized rate of about 20%. Going forward, the analysts consensus earnings growth is 25% (First Call). Value Line rates MXIM’s financial strength A and earnings predictability 60. The relative quality rating is 75. (Over 60 is good.)

Value. From the SSG, projected average return is 19.9% This assumes five-year EPS of 20% and projected high PE of 36.6. The upside downside ratio is 5.4. MXIM has no long term debt.

Company Description. Maxim Integrated Products, Inc. (the “Company”) designs, develops, manufactures, and markets linear and mixed-signal integrated circuits and is incorporated in the state of Delaware. The Company’s products include data converters, interface circuits, microprocessor supervisors, operational amplifiers, power supplies, multiplexers, delay lines, real-time clocks, microcontrollers, switches, battery chargers, battery management circuits, RF circuits, fiber optic transceivers, sensors, voltage references and T/E transmission products. The Company is a global company with manufacturing facilities in the United States, testing facilities in the Philippines and Thailand, and sales offices throughout the world. The Company’s products are sold to customers in numerous markets, including automotive, communications, consumer, data processing, industrial control, instrumentation and medical imaging.

Patterson has had a somewhat mediocre year but the company seems to be on track to improve sales and earnings in fiscal year 2007. (PDCO’s fiscal year begins on April 1.) PDCO has invested in sales and marketing. With its year-end earnings report, PDCO gave earnings per share guidance for 2007 of $1.61-1.64 (about 13% growth).

Growth. Value Line projects revenue growth of about 12% while Morningstar projects 13%. The revised stock selection guide uses 12%. Future growth will come from a combination of internal growth and small acquisitions. Internally, PDCO sets a goal for growth of 4% above the market. Its dental business is currently growing faster than its other lines of business.

Quality. PDCO remains a high quality stock (although Morningstar gives it a narrow moat). Manifest Investing rates quality at 71.3 (out of 100). Value Line rates PDCO’s financial strength an “A” and it earnings predictability 100.

Valuation. Projected average return is 13.5%. PDCO has always sold at relative high PE. Its current PE is about 24. The stock selection guide uses an average future PE of 24.

We purchased PDCO in March 2003 and have enjoyed an annualized return of 12.5%. It represents 2.25% of the portfolio. This would be a good time to add to our position.

Analysis from December 2, 2005

Looking back over the past year, the 18% growth we had projected for Patterson Dental did not materialize. (See summary below.) Both revenue and earnings haved slowed down. PDCO has had several quarters of declining growth. That is troubling. It is unclear whether these reduced growth rates have bottomed out. Look at the PERT A graph in the stock selection guide.

In a November 18 press release, PDCO revised its earnings guidance for the year down from $.35-.37 per share to $.32 per share. Patterson attributed reduced second quarter earnings to weaker than forecasted sales growth of basic dental equipment, including chairs, lights and cabinets. A below-plan performance at the Patterson Medical unit also contributed to the second quarter earnings shortfall. See also the most recent quarterly earnings report.

The weaker earnings thus far this year and the reduced earnings guidance seems to be largely reflected in the current price which is about 35% below its 52 week high.

Let’s review the basics.

Growth. Value Line project 3-5 sales growth of 12.5%. Morningstar projects 13% sales growth. First Call reports the analysts consensus for 5-year EPS growth as 18%. Our current stock selection guide uses a 5-yr projected revenue growth of 12.5%.

The preferred procedure in the stock selection guide assumes a pre-tax margin (PTM) of 12.5%, slightly higher than the current year PTM of 12.1%. Value Line project 14.3%. (PTM = 9% [net margin] / (1 -.375 [tax rate]).

Quality. The company’s quality remains strong with a RQR quality rating of 74.5. Value Line rates PDCO’s financial strength an “A” and its earnings predictability a “100.” Value Line projects a slight decline in return on equity (ROE) from 18% to 15% over the next 3-5 years. The most recent quarterly earnings report show reduced cash flow and free cash flow due to changes in assets and liabilities. We need to watch cash flow closely in the next 10Q and in the next earnings release to see if there is any fundamental change in the business model.

Valuation. The stock selection guide shows PDCO as a buy up to $32.90. The projected average return is 9.1% which assumes an average future PE of 21 ( 26 [high PE] + 16 [low PE] ) / 2 ).

Conclusion. PDCO remains a hold — for now. We need to monitor the upcoming quarters closely to make sure that lower growth rates for revenues and earnings this year do not reflect a fundamental change in PDCO’s business environment or its business model. Since PDCO remains a high quality company with an excellent track record, we can wait one or two more quarters before deciding whether to exchange PDCO for another quality stock with higher projected average return.

Analysis from November 14, 2004

The PDCO stock selection guide has been updated to reflect the 2 for 1 split on October 22, 2004.

Quality. Section 1 of the SSG (the graphs on page one), shows nearly straight lines. For PDCO, the correlation coefficient (r^2) is 1.0 for earnings and .99 for sales. This obviously is excellent. (Mathematically, a correlation coefficient of 1.0, when using least squares fitting, means that the data points are located on a straight line. See interactive example.)

Looking at Section 2 of the SSG, pre-tax profit margin and return on equity are trending up. That also is excellent. Value Line rates PDCO’s financial strength as “A” and earnings persistence as 100 (out of 100). These are both indicators of excellent management. Overall, PDCO is a high quality company.

Growth. PDCO’s historical earnings growth was 22% while sales growth was 15.%. Looking forward, Value Line projects PDCO’s earnings to grow at 17%. Analysts median projected growth is reported as 20% by First Call and 18.8% by Reuters. The PDCO stock selection guide (above) uses 18%.

Valuation. Using an average high PE of 27 (which is 1.5 x the projected growth rate), the potential high price for PDCO is $76.60. Projected average return (i.e., the return if the stock is sold in five years at the average historical PE) is 7.7%. Total return (i.e., the return if the stock is sold in five years at its average high PE)is 12.9%.

The average five-year PE for PDCO is 25.3. The current PE is 33.7. Thus, the relative value is 25.3 / 33.7 or 133%. Generally, a stock is fairly priced when the RV is between 85% and 110%. PDCO’s current price is outside the buy range. PDCO’s current upside downside ratio is 1.6 which is in the “hold” range.

Summary. PDCO (currently $39.31) is a “hold.” It is a buy below $31.90. It probably would be a sell if the upside downside ratio fell below 1.0 or if the relative value went above 150%.

Company Description: Patterson Dental Company distr. dental supplies in the U.S. and Can. through more than 1,200 direct sales reps. and equipment specialists. Also offers customers related services, including equip. installation, maintenance and repair, dental office design, and equip. financing. The Colwell Systems div. provides office supplies to medical and dental offices. The Webster Veterinary Supply unit provides companion-pet supplies to veterinary clinics. Canadian bus.: 6.8% of ’02 sls. Has abt. 4,770 empls., 4,244 stkhldrs. Off./dir. own 10.5% of stk.; FMR Corp., 12.9%, U.S. Bancorp, 9.2%. (8/03 Proxy). Chrmn. & CEO: Peter L. Frechette. Pres.: James Wiltz. Inc.: MN. Addr.: 1031 Mendota Heights Rd., St. Paul, MN 55120. Tel.: 612-686-1600. Web: www.pattersondental.com.