Smith Int'l (OP/A): 1Q2005 EPS above expectations, raising estimates + fair value to $85 Goldman Sachs April 25, 2005
SII 1Q2005 EPS of $0.65 beat our $0.64 estimate + $0.62 consensus w/ revenue + EBIT 3% above our estimate. Wilson (distribution) was the star performer w/ revenue + EBIT +9%/ +31% vs our estimate, followed by Smith Svs (drilling + completion tools) with Fluids + Drill Bits in line. Sequential oilfield (ex-distribution) incremental margins of 34% were improved, but stronger deepwater activity + pricing power in 2H2005 suggests significant improvement still lies ahead. We are raising our 2005- 06 EPS estimates to $2.75/ $3.45 from $2.70/ $3.30 and introducing a 2007 estimate of $3.95. We are also raising our fair value estimate to $85 from $83 and maintain our OP/A rating.
1Q05 EPS AHEAD OF EXPECTATION; INCREMENTAL MARGINS SUGGEST UPSIDE
SII 1Q2005 oilfield (ex-distribution) revenue rose 4%/ 20% sequentially/ year-over-year and was +0.4% vs our estimate. SII performance compared favorably to HAL +0.3%/ +20% and WFT -3%/+18%. Meanwhile, oilfield (ex-distribution) operating income rose 9%/32% and was 2% above our estimate. HAL oilfield operating income was +9%/ +100% and +2% our estimate and WFT oilfield profit was +5%/ +54% and -3% our estimate. Sequential oilfield (ex-distribution) incremental margins of 34% were ahead of our estimate of 29% driven by stronger pricing + mix (Smith Svs outpaced expectations while Fluids was in line). Distribution was the star performer in the quarter with revenue +11% sequentially and 44% year-over-year and 9% above our estimate. Distribution operating income was +41% sequentially and +340% year-over-year and +31% vs our estimate. Energy segment performance was strongest (margins approaching 5%), though midstream and downstream businesses improved as well.
MI-SWACO (68%/51% OF 2005 OFS REVENUE / EBIT): RESULTS IN LINE - WAITING FOR DEEPWATER PICKUP
MI-Swaco revenue was in line with our estimate and +4%/+19% seq/y-y. We estimate HAL's fluid revenue was +3% seq and +16% y-y. Canada accounted for the majority of the sequential revenue increase. We estimate M-I's EBIT margin in the 11% range and about as expected, with margins benefiting from 2-3% sequential improvement in NAM pricing. Mix of higher margin offshore activity was improved, but the increase in deepwater US Gulf activity is expected to be stronger in the second half of 2005 and should help to drive even stronger incremental margins.
DRILL BITS (15%/27% OF 2005 OFS REV/EBIT): IN LINE QUARTER
Smith bits revenue was in line with our estimate and +3%/+14% seq/y-y. Year-over-year growth slowed significantly from +26% in 4Q2005 - likely due to weaker export sales. Estimated EBIT margins were also in line. In contrast, it appears HAL bit revenue was +7% sequentially/ +15% year-over-year - albeit off a smaller base. Regionally, Canada and the Middle East showed strong improvement.
SMITH SVS- (16%/22% OF 2005 OFS REV/EBIT): PERFORMANCE AHEAD OF EXPECTATIONS
Smith Svs revenue was +4% our estimate and +6%/35% seq/y-y, benefiting from new product sales. We had estimate incremental margins of 30% and we believe actual results were in the 35-40% range.
DRIVERS OF ESTIMATE REVISIONS
We are raising our 2005 EPS estimate by $0.05 to $2.75 mainly to reflect higher earnings contribution from Distribution. For 2006, we are raising our EPS estimate by $0.15 to $3.45 to reflect higher EPS contribution from Wilson (+$0.18), slightly higher oilfield earnings (+0.02), offset by higher taxes/minority interest/other (-$0.05). We are assuming revenue growth of 17%/13% in 2005-06 and incremental margins of 26%/ 28%. We are also introducing a 2007 EPS estimate of $3.95. Based on Goldman Sachs commodity price forecast of $50/$55 per barrel, the oil industry reinvestment rate exiting 2006 would remain near historical lows, which we believe suggests strong potential for E&P spending to continue rising through 2007 by at least 5-10%. Our 2007 EPS estimate for SII assumes revenue growth of 8% and 27% incremental margins.
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. |
