Dresser-Rand Group Inc. (DRC): Lowering estimates following 2008 guidance; Reiterate Sell - Goldman Sachs - 10/31/07
What's changed
Reported 3Q2007 EPS of $0.25 versus our estimate of $0.19 and consensus of $0.20. Outperformance relative to our estimate was driven by foreign currency gains, which we do not expect to continue. Variance includes: New Units (-$0.02), Aftermarket (+$0.03), Corporate (-$0.01), Other (+$0.04), and Tax (+$0.01). Management guided to 4Q07 EPS of $0.58 - $0.73 (inclusive of curtailment gain). We updated our 2007/2008/2009 EPS estimates by +$0.11/-$0.09/+$0.11 to $1.42/$2.08/$2.81. Our 12-month price target of $36 is unchanged (=13.0x 2008 EV/DACF).
Implications
There is no change to our Sell rating on Dresser-Rand shares due to expensive valuation and we continue to see more upside in our Buy rated names.
(1) We saw another quarter of weak orders in the Aftermarket division due to procedural and logistical difficulties of two NOC customers. We believe that DRC is not losing market share in Aftermarket and that the orders will come, albeit with a longer lead time. For 2008, the company guided to revenue growth in the high single digits. We believe that this is achievable, but note that growth has slowed, which is worrisome, in our view.
(2) The strike at Painted Post facility continues and a settlement is unlikely in the near term. The company indicated that even if the strike goes into 2008, there will not be a material impact on the financial performance due to adjustments in cost structure. We continue to monitor the situation and believe that the risk is to the downside.
Valuation
Dresser-Rand shares are trading at 2008 P-E/EV-DACF of 18.6x/14.0x versus the oil services group at 15.3x/12.1x.
Key risks
Key upside risks include acceleration in project planning and execution, fast resolution to a labor strike, and a sustained rise in commodity prices and broader market indices. |
