Cameron International Corp. (CAM): Lack of pricing power, margin expansion offsets solid activity levels - Goldman Sachs - May 1, 2008 United States
What's changed
CAM reported 1Q2008 EPS of $0.55 versus our $0.52 and consensus of $0.54 - slightly above the guidance range $0.50-$0.53. Revenues of $1.34 bn were 16.5% better than we expected, driven primarily by 21% higher than expected revenue in Drilling and Production. But, overall operating income was only 4.3% higher than expected, as higher costs almost entirely offset the better revenues. We raised our 2008, 2009 and 2010 EPS estimates by 6%, 8%, and 8% to $2.65, $3.20, and $3.64.
Implications
We thought CAM reported a reasonably solid quarter and we generally like its solid execution, market share gains in subsea, and strong prospects for backlog growth. However, the challenges right now are that little pricing power appears to exist across most business lines, making margin expansion significantly more difficult. Right now, we think the stock will remain in a trading range, as strong activity levels and attractive valuation offset these concerns.
Key takeaways from the call are:
(1) We believe that CAM's forecast of 20% backlog growth in 2008 is attainable, but remains subject to
timing of project awards including the potential award of the lucrative Block 31 contract.
(2) Cost inflation and high price competition across the surface and Valves & Measurements segments are diluting an otherwise healthy demand environment.
(3) We sense that CAM is more actively looking at acquisitions with a preference towards surface and V&M.
Valuation
CAM shares are trading at 2009 P/E of 14.9x vs. FTI at 18.4x and NOV at 11.6x. We raised our 12-month price target to $50 from $46, which is between the mid and high values of our trading range
Key risks
Commodity price decline and sustained decline in equity indices. |
