SII (IL/A): Impressive Eastern Hemisphere performance relative to peers; Maintain IL/A - Goldman Sachs - April 25, 2006
SII posted strong 1Q06 results with best-in-class Eastern Hemisphere performance amongst the companies that have reported so far. EPS of $0.53 was $0.05 above our estimate and consensus of $0.48. We raised our '06/07 EPS forecast by $0.15/0.16 to $2.24/$2.84. We also raised our Fair value to $48 (13.5x '07 EV/DACF), which implies a 11% upside potential. Besides strong international performance, US results were also solid, led by recovery in the US deepwater market (North America revenues were up 11% sequentially). We maintain our IL/A rating for SII shares. Among the mid- cap service/equipment companies, WFT (OP/A) and CAM (OP/A) are still our favorite stocks.
RECOMMENDATION UPDATE: MAINTAIN IL/A RATING - Our new Fair Value of $48 (13.5x EV/DACF '07) implies 11% upside. SII has a strong management team focused on ROCE and a solid track record for acquisitions. 1Q06 performance also suggests that execution remains solid with impressive growth on Eastern Hemisphere relative to peers. However, at this point in the cycle, amongst the mid-cap service companies we continue to see more leverage, more room for growth/EPS revisions and more attractive valuation at Weatherford, rated OP/A. SII currently trades at an '07 EV/DACF of 12.3x, versus WFT's 11.0x.
IMPLICATIONS FOR THE INDUSTRY: BEST EASTERN HEMISPHERE PERFORMANCE AMONG COMPANIES THAT REPORTED SO FAR - SII reported best-in-class sequential Eastern Hemisphere revenue growth of 8%, compared to SLB's -1%, HAL's -4% and WFT's -6%. SII's year-over-year Eastern Hemisphere growth of 33% also scores well compared to SLB's 31% and HAL's 32%. We think the 1Q06 highlights SII's strong competitive position in international markets. SII attributed the strong performance to its strong relationships/exposure to accelerating E&P spending by national oil companies (NOCs) and major oil companies accelerating. We expect Eastern Hemisphere growth to remain a key area of focus over the coming quarters. Among our Top Picks, SLB and WFT should benefit the most from international growth.
WHAT TO WATCH FOR:
(1) Continued strong international growth;
(2) Ability to raise prices to offset raw material cost inflation;
(3) Deepwater activity in the Gulf of Mexico;
(4) Ability to make accretive acquisitions.
RAISING ESTIMATES, FAIR VALUE: We raised our '06/07 EPS forecast by $0.15/0.16 to $2.24/$2.84. We also raised our Fair value to $48 (13.5x '07 EV/DACF), which implies a 11% upside potential. The key drivers for our increased estimates were higher revenues for M-I SWACO and Smith Services.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Daniel Henriques, CFA, and Daniel Boyd, CFA.
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SII (IL/A): First Take - Solid execution continues; Maintain IL/A April 25, 2006
EPS of $0.53 was $0.05 above our estimate and consensus of $0.48. Management raised full year 2006 guidance to $2.15-2.25, from $2.00-2.10, versus our current estimate of $2.12 and consensus of $2.11. Better than expected performance in the 1Q06 was attributed to higher revenues (especially M-I SWACO and Smith Services), while sequential incremental margins were slightly below (24% versus GS 25% and last quarter's 27%). Recovery in the US deepwater market led to strong North American performance (revenues up 11% sequentially), which was also consistent with other companies that have reported so far. International growth was also better than expected in Europe/Africa, Middle East and Far East, highlighting Smith's strong international presence. We reiterate our IL/A rating for SII shares.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Daniel Henriques, CFA, and Daniel Boyd, CFA. |
