We have retained our Neutral recommendation for Cameron International Corporation (CAM) following its second quarter 2010 earnings release. Our decision reflects strong revenues and margins in most of the business segments, partially offset by volatility in the current environment.
Second Quarter Performance
Cameron’s second quarter 2010 earnings per share (excluding special items) were 58 cents, surpassing the Zacks Consensus Estimate of 55 cents. However, on a year-over- year basis, the adjusted earnings declined 3.3% from 60 cents in the second quarter 2009, due to decreased profits at the Compression Systems (CS) segment.
The company generated revenues of $1.45 billion, up 14.4% year over year, but fell from the Zacks Consensus Estimate of $1.47 billion.
On a segmental basis, the Drilling & Production Systems (“DPS”) and Valves & Measurement (“V&M”) segments posted year-over-year revenue growth of 18.0% and 19.7%, respectively. Revenues in the Compression Systems (“CS”) segment plunged 19.4% year over year.
During the quarter, Cameron received orders totaling $1.4 billion, up 54.0% year over year. Current order booking comprises DPS of 66%, V&M of 24% and CS of 10%. As of June 30, 2010, total backlog stood at $4.9 billion, down marginally (by 1.9%) from the year-ago quarter level, reflecting lower DPS and CS backlogs.
(Read our full coverage on this earnings report: Cameron Tops, Overcomes GoM Crisis).
Cameron expects 2010 full year earnings guidance to be between $2.30 and $2.35 per share while that for the third quarter of 2010 is projected to be in the range of 58 cents to 60 cents.
In our opinion, Cameron is favorably positioned in the subsea market, and the NATCO acquisition will boost its subsea development capabilities. Moreover, we expect Cameron to benefit from the increased orders following the Macondo well blow out due to higher equipment standards. The higher subsea revenues and sharply increasing demand for drilling systems are also expected to provide upside potential to earnings.
Cameron’s strong backlog along with a healthy financial position provides ample visibility for its earnings growth and cash flow prospects going forward. Cost restructuring initiatives by management have yielded beneficial results for all segments.
With a geographically diverse asset base, Cameron’s international operations will be a key growth catalyst in the coming months. Strong international operations are expected to offset the relatively soft U.S. drilling scene. We have identified Latin America, Asia Pacific and the Middle East as the lucrative markets in this regard.
However, the prolonged slowdown and weakness in commodity prices have impacted Cameron’s capital equipment related businesses and the situation is unlikely to recover within a short span of time. The company growth potential is also hampered by unstable demand for oil and gas.
Although a leading supplier of subsea production systems (Christmas trees), Cameron has lost market share due to severe competition from peers such as Weatherford International Ltd. (WFT) and National Oilwell Varco (NOV).
As a global player, Cameron is exposed to risks associated with operating business abroad. Uncertain geopolitical environment in many international areas will likely create challenges for the company.
Given the company’s propensity to acquire technology and complementary products, we believe there is a risk that Cameron may overpay for assets or purchase an incompatible or ineffective technology.
Considering these factors, we expect the stock to perform in line with its peers and the broader U.S. markets over the upcoming quarters.