ENSCO International, Inc. (ESV)

This is my #1 stock pick for August '09. I initially recommended this at $30, but never got around to writing a pitch until now. Even if it's creeped up a little bit to the $38 pricepoint, this still looks like an incredible bargain to me.

What makes ESV look particularly enticing is their low debt, great history of profitability, and position in an industry with strong growth potential. You’d think with that profile, the stock would be selling at a sizable premium, but that’s simply not the case.

Net tangible assets are around $33 per share and the stock has been selling in the $35 - $40 range. Now, consider their earnings: $8.11, $6.73, and $5.04 per share for FY ’08, ’07, and ’06 respectively. Based on FY ’08 earnings, the stock could easily be worth $120+. Indeed, ESV sold for around $80 in early ’08. Given the precipitous drop, you’d think earnings had dived off a cliff, except, they really haven’t. Sure, they’ve been affected by the downturn and drop in oil prices like everyone else in the industry, but they still managed scrape out earnings of $1.41 per share for Q2 for FY ’09, and $2.97 per share for the first half of ’09. If you annualize the later figure, that comes out to $5.94 per share --- which would suggest the stock should still be selling over $100.

It's not as if cash flows have been poor either. Operating cash flows have been very impressive, normally exceeding earnings. Free cash flows (FCF) are not quite as plentiful since Ensco continues to expand its operations; however, ESV has managed to stay FCF-positive throughout most of the past five years.

Maybe the market is still somewhat sour on oil, but given the high dependence on oil in the US, and increasing dependence in China and India, I still believe offshore oil related services are a winner in the long-term. Ensco looks like a real bargain at these prices. I am long on this in real life and I expect to hold it for many years.