Non-core segments drive 3Q07’s $0.05 beat; selling Food & Airport - Goldman Sachs - October 30, 2007
News
FMC Technologies reported 3Q07 EPS of $0.60, which was $0.05 better than we and consensus expected. Operating income from the core Energy Systems business was in-line with our expectations, although the mix was slightly different. Energy Processing beat by $0.02 due to higher Weco/Chiksan and fluid volumes, while Energy Production missed by $0.02 due to lower than expected subsea revenues. The EPS beat was mainly due to better performance in FoodTech (+$0.01) & Airport (+$0.02) and lower corporate expense (+$0.04), offset by a higher tax rate (-$0.02). Separately, FTI announced plans to spin-off its FoodTech and Airport business in a tax free transaction scheduled to close in mid-2008.
Analysis
We thought it was a relatively in-line quarter for FTI, as the EPS beat came mainly from non-core segments. Given the stock’s valuation (24.5X 2008 P/E vs. peer average of 16.0X), we suspect investors may have been looking for a little more out of the energy segment. Other takeaways from 3Q include:
(1) Subsea revenues were $79 million (13%) lower than we expected, possibly due to some trees being pushed off into 4Q.
(2) Quest Offshore published a 3Q07 update today, which showed that FTI received 47% of tree awards in the quarter (well-above its ~40% market share).
(3) However, Quest’s report also showed a reduction in the expected tree awards from 2008-2011 by 12% to 2,252 total trees, with the greatest downward revision in 2008.
(4) Lastly, FTI’s FoodTech & Airport spin-off allows it to become an Energy pure-play. These two segments contributed approximately $56 million of operating income ytd, or 17% of the total.
Implications
Given performance over the past week (+16%), we don’t believe the results are enough to fuel the rally. The positives associated with the earnings beat, strong market share and spin-off are partially offset by the tempered market outlook for subsea tree awards from Quest and in-line results from the core business in our view. Our price target is under review. |
