Cooper Cameron (IL/A): Just starting to fire on all cylinders
Goldman Sachs July 21, 2005
After underperforming its peers by 23% in 2004, CAM shares are in line this year, but the company appears to be entering the point in the cycle where relative outperformance is more likely. With improved earnings visibility from backlog build, classic later cycle exposure + potential catalysts (subsea awards + accretive acquisitions), CAM is one of our favorite In- Line rated stocks (coverage view Attractive). CAM 2Q2005 EPS was well ahead of expectations with all divisions (even compression) contributing and orders were very strong (+125% y-y) across all divisions. We are raising our 2005-07 EPS estimates to $2.90/ $3.95/ $4.40 from $2.70/ $3.60/ $4.15 as well as our fair value estimate to $85 (21.6x 2006 PE = +27% potential) from $78.
2Q2005 EPS AHEAD OF EXPECTATIONS
CAM 2Q2005 EPS of $0.70 was well ahead of our estimate of $0.62 (consensus = $0.61). Revenue was +9% sequentially and y-y and 4% above our estimate. EBITDA was +7% with margins +30bps vs expectations. Total orders were $1.1 billion, up 125% y-y and 63% seq. Cameron division orders rose 167%/110% y-y/seq. Valves/Compression orders were +78%/+21% y-y. Total backlog at the end of the quarter was $1.62 billion, +70% y-y and +43% sequentially.
CAMERON: (60%/56% of 2005E revenue/EBITDA): 2H05 AND 2006 OUTLOOK SOLID Cameron division 2Q05 revenue was in line with EBITDA +6% versus our estimate. Revenue was +7% y-y and +3% seq. EBITDA margin was 14.1%, 80bps above our estimate excluding the impact of changes in the unallocated EBITDA. With improving mix of higher margin surface equipment sales, better pricing across the board and longer-term upside from large subsea awards, the outlook is very solid. We expect Cameron division revenue to be +3%/+19% in 2005/2006 with the ramp-up in 2006 primarily driven by higher subsea revenue (+50% aided by contribution from the Akpo project). We expect EBITDA margins of 14%/16% in 2005/2006 up about +200 bps each year.
VALVES: (24%/32% of 2005E revenue/EBITDA): STRONG PERFORMANCE APPEARS SUSTAINABLE CAM's Valve division revenue and EBITDA were +14%/+34% vs our estimate. Revenue was +24%/70% seq/y-y reflecting several successful acquisitions + consolidation benefits + stronger pricing. 1Q05 EBITDA margin of 20.3% was + 410bps/+640bps seq/y-y. Given business momentum and strong order rate (+78% y-y) we expect CCV to continue to post strong results. We expect 2005/2006 CCV revenue to be +70%/24% with margins +520/130bps.
COMPRESSION: (16%/12% of 2005E revenue/EBITDA): A LAGGARD TURNING THE CORNER? Compression division 2Q2005 revenue and EBITDA was +14%/+22% vs our estimate. Revenue was +10%/+19% y-y/seq. EBITDA margin of 11.1% was 60 bps above our estimate and +150bps/-30 bps seq/y-y. While higher material costs continues to affect margins, strong backlog (+34%/34% y-y/seq) bodes well for future results.
DRIVERS OF ESTIMATE REVISIONS
We are raising our 2005 EPS estimate to $2.90 from $2.70 to reflect 2Q05 outperformance (+$0.08), and higher valve margins offset by other expenses (+$0.12). For 2006, we are raising our EPS estimate by $0.35 to $3.95 to reflect higher earnings contribution from Cameron (+$0.14), Valves (+0.33) and Compression (+$0.05) offset by other expenses (-$0.17). We are also raising our 2007 estimate to $4.40 from $4.15 to reflect the impact of stronger rig newbuilding and subsea demand at Cameron and acquisitions and margins in valves.
WITH STRONG CASH FLOW POSITION, CAM IS EVALUATING 4-6 TRANSACTIONS
With net debt to capital of 9% at the end of 2Q2005 and an outlook for significant free cash generation, CAM is well positioned to augment earnings power through accretive acquisitions. CAM mgt indicated that they are currently evaluating several potential transactions.
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. |
