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Gold/Mining/Energy : RON - Cooper Cameron

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From: Dennis Roth	8/1/2007 9:29:01 AM
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Seeing upside to margins; small acquisitions are likely - Goldman Sachs - August 01, 2007 What's changed Adjusted 2Q EPS of $1.02 was above our and consensus estimate of $0.95. Variance to our estimate was driven by: Compression Systems (+$0.06); Valves and Measurement (+$0.04); and Drilling and Production Systems (-$0.02). We raised our 2007/2008/2009 EPS forecasts by $0.14/$0.31/$0.39 or to $4.16/$5.07/$5.63. We also raised our 12-month price target by $7 to $85 (=14.0x 2008 EV/DACF) due to higher estimates and solid execution. Management raised its 2007 EPS guidance to $4.10-$4.20 from $3.85-$4.00. Implications (1) We see upside to margins going forward. DPS' EBITDA margin in 2Q07 was impacted by an unfavorable mix, increase in raw materials pricing, and higher outsourcing costs. We expect margins to improve going forward as the company implements a price increase and brings more manufacturing in-house. Additional capacity is expected to come from a new facility in Romania; (2) Management expects a pick up in number small/medium size acquisition opportunities as private business owners become more motivated to sell (in fear of potential tax law changes) and as competition from financial buyers wanes. We expect Cameron to target US based businesses with complimentary product offerings, with a particular focus on its Surface, Valves, and Measurement businesses. Companies with an aftermarket component would be especially desirable. While there are likely more opportunities in the $10-50 million range, we believe Cameron is also open to doing deals larger than $300 million. Valuation Cameron is trading at a 2008 EV-DACF/P-E of 12.9x/15.4x, versus 14.2x/17.5x for FTI and 11.2x/13.0x for National Oilwell Varco. Key risks Key risks to our thesis include: (1) A US/Global recession could result in weaker commodity prices and E&P capex cuts; and (2) Weakness in natural gas prices could lead to E&P capex cuts in North America.

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