Smith International, Inc. (SII) Message Board

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Gold/Mining/Energy : Smith International, Inc. (SII)

SII 81.95

+0.2%

Oct 31 9:30 AM EST

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From: Dennis Roth	10/25/2007 7:06:10 AM
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Smith International Inc. (SII): Solid third quarter; positive outlook on deepwater market 10-24-2007 What's changed Smith reported 3Q2007 EPS of $0.83, which was in line with our and the consensus estimates. We are raising our 2007/2008/2009 EPS forecasts by $0.01/$0.05/$0.11 to $3.21/$4.11/$5.02. Management updated 2007 EPS guidance to the "high end" of its $3.15-$3.25 range (including $0.04 tax benefit, which we exclude). Implications (1) There is no change to our Neutral rating on SII. The in-line quarter demonstrated the attractiveness of the company's international revenue mix and its dominant fluids business but also highlighted the risk of its exposure to lower-visibility markets. (2) M-I SWACO revenue increased 2% sequentially (vs. our +3% estimate), despite weather-related softness in US Gulf of Mexico (GoM) (-$0.01 impact) and offshore project delays. We expect the GoM to recover in 4Q with deepwater rig additions, and SII commented that the E. Hemisphere project delays should be a one-quarter issue, so they should not affect the longer-term outlook for the business. (3) Operating margin was 15.6%, up 60 bp from 3Q2006. SII managed to offset a less favorable business mix (lower offshore revenues) inM-I SWACO with strong sales of high-margin bits (+8% yoy) and tubulars. SII also said it saw modestly higher prices in 3Q versus 2Q. (4) Geographically, deviations from our estimates occurred in Latin America (revenues 29% better than GS) due to activity from recent fluids contracts and Middle East (10% lower than GS) as the sale of a JV accounted for almost half of the shortfall. Valuation Smith is trading at a 2008E EV-DACF/P-E of 12.8X/16.2X vs. the peer group of 12.5X/15.7X. We are tweaking our 12-month price target by $1 to $76 (14.5X 2008 EV/DACF) due to slightly higher estimates. Key risks Key risks include capacity additions, a sustained decline in commodity prices, and the broader stock market indices. Goldman Sachs Global Investment Research

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