CAM (OP/A): Raising estimates, fair value; Reiterate OP/A - Goldman Sachs - April 27, 2006
Cooper Cameron (CAM) reported strong 1Q06 results above our estimates and consensus. Orders of $1.34 bn (vs GS $684 mn and 4Q05's $786 mn) reached an all-time-high led by record bookings of drilling equipment (deepwater rig construction). CAM and NOV results highlight the fact that demand for rig equipment remains very strong, which we think should continue into 2007. We raised our '06/07 EPS forecast by $0.21/0.33 to $2.39/$3.29. We also raised our fair value to $60 (14x CY2007E EV/DACF), which implies a 25% upside potential. We think that CAM (rated OP/A and one of our Top Picks) is still the best vehicle to invest in the backlog theme, with a great combination of good visibility and compelling growth at attractive valuation.
RECOMMENDATION UPDATE: REITERATE CAM AS ONE OF OUR TOP PICKS
- We reiterate our OP/A rating for CAM shares. We see 25% upside to our new fair value of $60 (=14x '07E EV/DACF). The combination of good earnings visibility ($2.7 bn backlog), leverage to secular deepwater growth (subsea), exposure to rig newbuild cycle, synergy upside from recent acquisition of Dresser and attractive valuation are the key reasons for our OP/A rating. CAM is trading at an '07E EV/DACF multiple of 11.1x, versus 12.2x for NOV and 13.0x for FTI (we will update our FTI model following 1Q06 results, scheduled for 5/9, which may lower the multiple).
IMPLICATIONS FOR THE INDUSTRY #1:
STRONG DEMAND FOR RIG EQUIPMENT - Both CAM and National Oilwell Varco (NOV) posted very strong bookings that highlight the fact that demand for rig equipment remains very strong. CAM posted impressive drilling equipment orders of $305 million (only new units) and NOV posted all-time-high rig technology orders of $1.3 bn, up substantially from last quarter's $70/$900 million, respectively. Even though it may be difficult for the 2Q06 to repeat the impressive order levels of the 1Q06, we expect to see continued strong demand for rig equipment into 2007 as several of the newbuild announcements have not yet placed equipment orders and/or may have placed only partial orders at this point.
IMPLICATIONS FOR THE INDUSTRY #2:
SUBSEA ORDERS 100-110 THIS QUARTER - 3 Highlights:
(1) ACTIVITY STILL STRONG AND MORE TO COME 2H06:
CAM's CEO stated that orders for subsea trees were in the 100-110 range in the 1Q06. This number is consistent with Quest Offshore's estimate of 106 and flattish yoy, but down slightly sequentially from 116. West Africa was supposedly the soft spot this quarter but the growth potential in the region remains compelling with around 150 potential tree awards by the end of the year. CAM also suggested that the outlook for the year remains robust and that we should see larger project orders in the 2H06.
(2) MARKET SHARE WITH NORMAL QUARTERLY VOLATILITY:
CAM booked 32 tree orders (~$135 mn) this quarter and took about 30% market share. According to Quest Offshore's database, FTI had 32% market share, Vetco Gray 25%, Dril-Quip 8% and Aker Kvaerner 5%. Market shares are always very volatile from quarter to quarter and should not be perpetuated. Overall, we do not anticipate major market share changes in full year 2006 vs 2005.
(3) PRICING GETTING BETTER:
CAM comments suggest that subsea pricing continues to improve.
INTEGRATION WITH DRESSER BETTER THAN EXPECTED:
CAM lowered its estimate of integration costs related to the Dresser acquisition to $42-43 mn, from $55 million. This change has about a $0.07 EPS impact on '06E results and about half of this improvement represents cash savings. This is a positive for CAM shares and suggests that the integration is going faster/better than expected. EBITDA contribution from Dresser in 2006 is expected to be around $30 million and management feels confident that it can expand to $70 million in 2007. We continue to believe that expansion of Dresser margins over the coming quarters will be a key driver for EBIT growth at Cooper Cameron Valves (CCV) and a source of potential upwards EPS revisions.
WHAT TO WATCH FOR:
(1) New orders;
(2) Execution of large orders; and
(3) Continued execution of Dresser integration.
RAISING ESTIMATES, FAIR VALUE:
We raised our '06/07 EPS forecast by $0.21/0.33 to $2.39/$3.29. We also raised our Fair value to $60 (14x CY2007E EV/DACF), which implies a 25% upside potential. The key drivers for our increased estimates were higher revenues and margins as a result of strong orders/incrementals in the 1Q06. The $0.21 increase in our 2006 EPS estimate can be broken down as follows:
(1) Cameron (+$0.27);
(2) Cooper Cameron Valves (+$0.08);
(3) Cooper Compression (+$0.07);
(4) higher corporate expenses (-$0.10);
(5) higher share count (-$0.07); and
(6) other non-operating items (-$0.04).
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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CAM (OP/A): First Take - Did someone order backlog? April 27, 2006
Cooper Cameron normalized EPS of $0.52 (ex-Dresser integration costs of $0.05) was well above our $0.42 and consensus of $0.41. Orders of $1.34 bn (vs GS $684 mn and 4Q05's $786 mn) reached an all-time-high led by record bookings of drilling equipment (deepwater rig construction). Besides stronger than expected revenues, margins at Cameron and Cooper Compression were well above our estimates and more than compensated lower margins at Cooper Cameron Valves (Dresser Impact). Management raised '06 guidance substantially to $2.28-2.38 (ex-Dresser Integration costs), compared to our above-consensus $2.18. We think that CAM (rated OP/A and one of our Top Picks) is still the best vehicle to participate in the backlog theme, with a great combination of good visibility and compelling growth at attractive valuation. We considered the increase in working capital needs this quarter as normal given the strong growth outlook.
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. |
