Cameron International Corp. (CAM): EPS beat highlights benefit of CAM's product diversity - Goldman Sachs - 11/01/07
What's changed
Cameron reported 3Q07 EPS of $1.14 versus our $1.08 estimate and the consensus estimate of $1.09. The $0.06 EPS beat occurred almost entirely at the operating margin level, where CAM exceeded expectations in all three segments - by 110 bps in DPS to 18%, by 120 bps in V&M to 21.5% and by 350 bps in Compression to 15.9%. We are raising our 2007, 2008 and 2009 EPS estimates by $0.09, $0.08, and $0.13 to $4.25, $5.32 and $6.27, given our expectations that a new benchmark has been set at the margin level, especially in DPS and Compression segments.
Implications
There is no change to our Neutral rating on Cameron. The margin expansion story this quarter is very encouraging, as is the diversity of its business mix. However, we believe investors will continue to question the visibility of the subsea market over the near-term, which may keep the shares in a trading range. For investors interested in subsea exposure, we prefer Cameron because its business diversity provides protection against subsea’s near-term sentiment swings.
Other takeaways from 3Q07 include:
(1) Management has recently scaled back share repurchases in order to have “dry powder” for acquisition opportunities, where it believes valuations are becoming more attractive.
(2) Timing uncertainty in subsea may be offset by strength in Surface where international prospects are expected to improve.
(3) The outlook for V&M and Compression appears quite robust, as orders improved 15% and 49% year-over-year.
Valuation
CAM is trading at a 2008 P-E/EV-DACF of 17.9x/15.4x versus the FMC at 21.8x/17.2x and NOV at 14.6x/12.3x. We raised our 12-month price target by $3 to $99 (16.0x 2008 EV/DACF) due to confidence in the business mix.
Key risks
Key risks include a sustained decline in commodity prices and the broader stock market indices. |
