Smith International Inc. (SII): Lowering estimates and price target on weaker '08 outlook - Goldman Sachs - 01/29/08
What's changed
We are lowering our 2008 EPS estimates on Smith International to $3.76 from $4.11 to account for our expectation for the lack of growth in deepwater drilling in 1H08, prolonged weakness in the US Gulf Coast jackup market, less opportunities for near-term margin expansion and prolonged weakness in the premium tubular sales market. Our 2009 and 2010 estimates are also lowered by 9% and 2% to $4.59 and $5.20.
Implications
Given the flattish North American drilling activity expected in 1H08 and limited offshore newbuild deliveries expected in 1H08, we do not see many catalysts in the near-term to drive the shares materially higher. Therefore, we remain Neutral on the stock.
Key takeaways from the results include:
(1) With 60% of new 2008 offshore rig deliveries in 2H08, we expect yoy EPS growth to be slower in 1H08 than 2H08, and are modeling 13%, 16%, 18% and 27% for 1Q, 2Q, 3Q and 4Q.
(2) We lowered our margin expansion forecast in 2008 to 55 bps from 120 bps due to our expectation for additional labor cost inflation, more modest price increases, and lower activity in higher-margin Gulf of Mexico market.
(3) We thought Smith Technologies was a standout in 4Q and we see pricing increases, improved market penetration and greater efficiencies supporting growth in 2008.
(4) Smith should gain jackup market share as rigs are moved from the Gulf of Mexico to international markets.
Valuation
SII is trading at 2008 P-E/EV-DACF of 15.1x/11.9x versus HAL at 12.0x/9.4x, BHI at 13.0x/9.5x and SLB at 16.4x/12.4x. We lowered our 12-month EV/DACF based price target to $64 from $69 due to lower estimates.
Key risks
Weaker-than-expected global economic growth or lower-than-expected oil company spending internationally. |
