Oceaneering currently trades at $51.56 and has been a dream stock for shareholders. It’s returned 333% since August 2021, blowing past the S&P 500’s 71.9% gain. The company has also beaten the index over the past six months as its stock price is up 38.5% thanks to its solid quarterly results.
Is now the time to buy Oceaneering, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Oceaneering Will Underperform?
We’re happy investors have made money, but we’re cautious about Oceaneering. Here are three reasons you should be careful with OII, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Cyclical sectors like Energy often flatter weaker operators during favorable price environments, but a longer-term lens separates those from businesses that can consistently perform across market cycles. Unfortunately, Oceaneering’s 9.8% annualized revenue growth over the last five years was mediocre. This was below our standard for the energy upstream and integrated energy sector.
2. Low Gross Margin Reveals Weak Structural Profitability
In a single quarter or year, gross margins in the sector can swing wildly due to commodity prices, hedging, or changes in labor costs. Over a multi-year period across different points in the cycle, gross margin differences can signal whether a company is a structurally-advantaged producer (“rock” quality, takeaway, operating costs) or not.
Oceaneering, which averaged 17.7% gross margin over the last five years, exhibited bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Oceaneering has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 4.5%, below what we’d expect for an upstream and integrated energy business.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Oceaneering, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 24.2× forward P/E (or $51.56 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of our top digital advertising picks.
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