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Gold/Mining/Energy : Smith International, Inc. (SII) -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (8)	4/23/2008 8:54:54 AM
From: Dennis Roth	Respond to of 16

Smith International Inc. (SII): Solid 1Q results driven by offshore fluids; raising price target to $79 - Goldman Sacks - April 23, 2008 What's changed We are raising our 12-month price target for SII to $79 (16.8X 2009E EPS) from $69 given M-I SWACO’s ability to capture the benefits of an improved North America environment and its positioning for the newbuild offshore rigs set to begin hitting the market in 2H2008. We are also modestly adjusting our 2008-2010 EPS by 2%, 2% and 3% to reflect slightly higher margin assumptions associated with a greater mix of offshore business. Implications Of the five oil services companies that have reported, Smith International was the only one that beat our operating income expectations—a testament to management’s consistent execution, in our view. We generally like SII’s business lines and its positioning for the offshore rigs coming to market, but we thought little was offered on the results as reasons to get incrementally more positive on the stock, and therefore we remain Neutral rated. We see potential for upside to estimates depending on the pace at which North America land rigs enter the market in 2H2008, but even if the rigs come faster and in greater amounts than expected, we see better upside in HAL and SLB. Key takeaways include: (1) M-I SWACO will be driven by increased offshore activity beginning in 2H2008 and led by Brazil over the next several years, where it has 50% market share. (2) SII estimates another 100 rigs to be added in the US by year-end, which should bridge growth until the newbuild rigs are added. (3) Offshore margins are significantly higher than overall margins, and as offshore comprises a greater percentage of growth in 2009 and beyond, Smith’s margins should improve. Valuation SII is trading at a 2009 P/E of 16.3X vs. 17.6X for SLB and 13.5X for HAL. Key risks Key risks include a sustained decline in commodity prices and the broader stock market indices.