Don't Overreact to Cameron's Downgrade
Written by: Richard Saintvilus
Tickers in this article:
CAM NOV SLB WFT
NEW YORK (TheStreet) -- It came as no surprise to learn that shares of oilfield services company Cameron International was downgraded by analysts at UBS following the company's third-quarter earnings miss. What did surprise, however, was that the stock fell 15% in what I can only describe as an overreaction. While other agencies will likely follow UBS' pessimism, I believe Cameron now presents an opportunity for investors looking for exposure in the energy sector.
First, we have to realize that unlike other sectors, Cameron's revenue and gross margins are not the driving forces of this stock, which is the same case for rivals such as National Oilwell Varco and Weatherford International . Yet, some of these points are cited as reasons for the near-term bearishness. What's really important to Cameron, and for that matter this entire sector, are the volume of orders received. I won't disagree that it's an "unpredictable" metric. Still, in that regard, Cameron is outperforming expectations.
Third quarter orders were up 32% year-over-year to more than $3 billion, helped (in part) by better-than-expected demand in OneSubsea, a joint venture formed by Cameron and Schlumberger which they own 60/40, respectively. Not only did OneSubsea generate more than $1 billion this quarter in orders, but it also means that Cameron's backlog, which now stands at more than $11 billion, jumped almost 50% from last year.
It doesn't escape me that these doubts being spewed about Cameron today are coming from some of the same people that had reservations about the OneSubsea's prospects. They essentially said that this joint venture, which closed in June, wouldn't work. But in actuality, it's starting to pay huge dividends for both companies, given that their combined capabilities in deepwater innovation and integration platform.
What's more, I don't believe Cameron's downgrade was justified from an operational perspective. While I did point out earlier that revenue performances are secondary to orders results, it's not as if Cameron stunk it up in that area. Total revenues were up 13% year-over-year to $2.5 billion. This is another area where OneSubsea is creating value as Cameron was able to sell 85 subsea pumping units. The problem has been the margins. Management talked about the strong demand for things like jack-up and floaters and a strong performance in the aftermarket business. But it's costing more money than management would like to spend to actually deliver these items. I believe this is one of those cases where investors have to be willing take the good with the bad, while trusting that management can bring more efficiency to the operation. The UBS analyst is not as optimistic in the short term.
That said, while management didn't explicitly say that investors should expect meaningful improvements in fourth-quarter profits, they didn't sound very optimistic, either. And that can mean one of two things. First, they may be low-balling expectations just a bit so they can come out as heroes when they beat them. Or they can actually be telling the truth.
In either case, given the strong order performance, not to mention the significant backlog, these shares, which have posted gains of only 5% in the trailing 12 months, are still cheap. Plus, it's worth noting that although management's tone in the conference call wasn't overwhelmingly positive regarding the fourth quarter, they did cite that the increase in costs were due to plant delays with capacity expansions.
What this means is that there are initiatives in place to shore up margins, but perhaps not right away. And I believe patient investors, especially those that have bought on this overreaction, will do very well here. On the strength on OneSubsea and solid backlog, Cameron stock should command a fair market value north of $70 per share in the next 12 to 18 months.
At the time of publication, the author held no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.