CAM (IL/A): Strong 1Q2005 EPS, raising estimates April 25, 2005
CAM 1Q2005 EPS of $0.53 beat Goldman Sachs estimate of $0.46 and consensus of $0.40 w/ the valves division the star performer on stronger pricing and the contribution from recent acquisitions. Cameron division revenue was stronger than expected, but low margin revenue from a recent acquisition weighed on margins relative to expectations, with underlying margins better than expected. Compression was below expectations, but strong order trends underscore an improved outlook. Overall order trends were excellent (+62% yoy) despite no large subsea orders, which appear to be on the horizon (i.e., Akpo). We are raising our 2005-06 EPS estimates to $2.70/ $3.40 from $2.40/ $2.95 + are introducing a 2007 EPS estimate of $4.00. We are also raising our fair value estimate to $78 (23x 2006 PE = +36% potential) from $69 and maintain our IL/ A rating with a positive bias.
1Q2005 EPS AHEAD OF EXPECTATIONS; ORDERS IMPRESSIVE
CAM 1Q2005 EPS of $0.53 was ahead of our Street-high estimate of $0.46 (consensus = $0.40). Revenue was flat sequentially and +18% year over year and was 5% above our estimate. EBITDA was 8% above our estimate and incremental margins of 20.1% compared to our estimate of 18.8%. Total orders were $680 million, +62%/+6% y-y/seq. Cameron division orders rose 73% y-y despite no large subsea orders. Valves/Compression div orders were +68%/29% y-y. Total backlog at the end of the quarter was $1.1 billion, up 11%/13% y-y/seq.
CAMERON:(63%/62% of 2005E revenue/EBITDA): RESULTS IN LINE; MARGINS EXPECTED TO RISE IN 2H05
Cameron division 1Q05 revenue and EBITDA was +5% and -2% versus our estimate. Revenue was +10% y-y, but -2% seq. The y-y improvement in revenue was driven by surface equipment (+12%), Petreco (+300%) and aftermarket (+13%), offset by lower revenue in drilling equipment (where we are in the cycle) + subsea (timing). EBITDA margin was 12.2% = 90bps below our estimate w/ margins in line excluding the impact of low-margin revenue ($32 mln, ~5% margins) from Petreco (recent acquisition).
VALVES:(21%/24% of 2005E revenue/EBITDA):STAR PERFORMANCE IN 1Q2005 APPEARS SUSTAINABLE
CAM's Valve division revenue and EBITDA were +12%/+45% vs our estimate. Revenue was +25%/60% seq/y-y reflecting several successful acquisitions + improvement in pricing. 1Q05 EBITDA margin of 16.2% was + 430bps/+140bps seq/y-y.
COMPRESSION:(15%/14% of 2005E revenue/EBITDA): STRONG ORDER TRENDS BODE WELL
Compression division 1Q2005 revenue and EBITDA was -7%/-25% vs our estimate. Revenue was +11% y-y, but -16% sequentially. EBITDA margin of 9.6% was 240 bps below our estimate and -300bps/-140 bps seq/y-y. While higher material costs continues to affect margins, and we have lowered our estimates somewhat, we expect implemented price increases + strong order trends (+29%/42% y-y/seq) to drive improved results.
DRIVERS OF ESTIMATE REVISIONS
We are raising our 2005 EPS estimate to $2.70 from $2.40 to reflect 1Q05 outperformance (+$0.07), elimination of option expense (+0.10) and higher valve margins ($0.22), offset by lower margins in compression ($-0.09). For 2006, we are raising our EPS estimate by $0.45 to $3.40 to reflect higher earnings contribution from Cameron (+$0.29) and Valves (+0.21), offset by lower Compression (-$0.03) and other (-$0.02). We are introducing a 2007 EPS estimate of $4.00. Based on Goldman Sachs commodity price forecast of $50/$55 per barrel, oil industry reinvestment rate existing 2006 would approximate 51% - which is at the low end of the historical range. Under this scenario, we believe, it is likely that E&P spending would continue rising through 2007 by at least 5-10%. Our 2007 EPS estimate for CAM assumes revenue growth of 8% with EBITDA margin of 14.5%.
CAM REMAINS OPTIMISTIC ABOUT ACQUISITIONS
CAM mgt indicates that it is optimistic about potential for accretive acquisitions and with net debt to capital of 11% at the end of 1Q2005 and an outlook for significant free cash generation - we estimate $135mln + $165 mln in 2005 + 06, CAM is well positioned to augment earnings power.
I, Terry Darling, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
