FMC Technologies (FTI): Solid 1Q results, but valuation, competitive landscape hold us back - Goldman Sachs - April 30, 2008
What's changed
FMC Technologies reported adjusted 1Q08 operating EPS of $0.69 – better than our $0.61 estimate and the consensus $0.62 estimate. Reported EPS was $0.62 and included a $0.01 charge for associated with the Food/Airport spin-off and a $0.06 charge associated with foreign currency contracts which will be reversed over the next few years. The operating results were better than we expected - driven by 6% higher revenues and 10% higher EBIT in Energy Systems, while orders were 17% higher. The positive subsea secular theme remains intact, as 1Q08 was the highest quarter ever for new industry tree awards. We are raising our 2008-2010 EPS estimates by 3%, 2% and 4% to $3.00, $3.56 and $4.12.
Implications
We cannot dispute the solid quarter and continued bullish outlook for subsea equipment, though we remain Sell-rated at this time for three reasons:
(1) At 18.5X 2009 EPS (vs. peers of 14.0X) and 2009 EPS growth of 19% (vs. peers of 20%), we think valuation is stretched given its in-line growth.
(2) The subsea market is getting more competitive, which could pressure pricing and FTI’s market share. And,
(3) A near-term pullback in oil prices could affect FTI more, given its high leverage to oil over gas.
Key takeaways from the call include:
(1) FTI sees potential opportunities for 12 additional subsea separation projects over the next 1-2 years.
(2) Energy systems margins are likely to be around 11% in 2008 – slightly lower than 1Q levels.
(3) We expect Energy Production backlog to be slightly up in 2008 from 2007 to $4.2 bn.
Valuation
We adjusted our 12-month price target to $62 from $56, which is between our mid-and high range. Our price target is based on 17.5X 2009 EPS.
Key risks
Continued decline in commodity prices or broader marker indices. |
