Broadly defined, there are three primary ways to play energy cycles – exploration and production companies (ranging from tiny wildcatters to huge international behemoths), service companies, and equipment companies – and they all have their own cycles and quirks. In the case of equipment companies, it's often the case that the stocks make the biggest moves early in the cycle as orders are announced only to taper off as those orders actually turn into revenue and earnings. To that end, while Cameron (NYSE:CAM) appears to have meaningful untapped margin leverage, as well as significant revenue and cash flow growth prospects, it hasn't always been a smart move to hang around after the big order announcements.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

But The Orders Keep Coming In...
To that end, while Cameron reported a relatively disappointing first quarter a little while ago (below many analysts' expectations and at the low end of company guidance), most of the talk focused on the strong incoming orders.

Revenue did climb 17% from the year-ago level (and fell 13% sequentially), but orders jumped 41%. Cameron exited the quarter with a backlog of about $10 billion – an all-time high for the company. Better still, many of these orders are involving more products per order (more components, controls, etc.), which should help margins. What's more, aftermarket demand is improving and that should offer a boost to subsea margins for Cameron (as well as FMC Technologies (NYSE:FTI)).

Speaking of orders, even with this surge Cameron's backlog relative to capacity is not all that large when compared to FMC or General Electric's (NYSE:GE) Vetco business. As this process rolls on, then, I'm curious to see how bidding activity will evolve – will GE and FMC continue to bid aggressively (and risk over-building capacity and hurting margins), or will Cameron be able to take advantage of less incremental capacity at these rivals?

SEE: A Look At Corporate Profit Margins

Big Things Expected From OneSubsea
Almost every sell-side analyst covering Cameron already seems to expect big things from OneSubsea – the company's 60/40 joint venture with Schlumberger (NYSE:SLB) for subsea equipment and systems. I can understand the enthusiasm; the combination of the two companies' expertise and technology should be compelling, and could very well vault Cameron ahead of FMC Technologies in emerging markets like subsea separation.

The combination should also broaden Cameron's customer base. Right now Petrobras (NYSE:PBR) is about half of the company's subsea backlog, and a handful of other large players (BP (NYSE:BP), Chevron (NYSE:CVX), Husky, and Petronas) making up another quarter. With Schlumberger's capabilities in reservoir characterization, artificial lift, pumps, and so on, OneSubsea should attract customers that otherwise would have gone with GE or FMC, and that should fill out the company's subsea manufacturing capacity.

Will The Cycle Disappoint?
The energy sector being what it is, of course there are execution risks that could derail Cameron's prospects. The multinational energy companies are at least talking about being more restrained and disciplined in their project plans, eschewing “drill baby drill” for a greater focus on economic returns and cash flow. If that leads to a more restrained spending cycle, it won't be helpful for the big equipment companies like Cameron, GE, FMC, and National Oilwell Varco (NYSE:NOV). That said, global energy prices are still offering good incentives to continue exploring and producing, and Cameron and National Oilwell can continue to benefit from rig equipment demand (particularly as a large number of floaters and jack-up go into service in the coming years) and onshore demand in areas like fracking and pressure pumping.

The Bottom Line
If Cameron's reported order book keeps growing at a faster than expected rate, the stock should do well. That said, investors would do well to remember that Cameron (as well as National Oilwell and FMC) don't tend to look so good from a long-term cash flow perspective. Consequently, these are not particularly good buy-and-hold stocks for investors who are looking for multi-year positions.

SEE: 5 Must-Have Metrics For Value Investors

Cameron's median EV/EBITDA multiple falls in the 9x to 9.5x range, with the recent OneSubsea venture implying a double-digit multiple for the subsea business. Using a 9.5x multiple for the next 12 months (as this is still the order-growth phase of the cycle), Cameron's fair value looks close to $70. That's a worthwhile move from today's prove, particularly as these stocks tend to overshoot when the cycle gets going. As a result, I still think there's time to buy Cameron and enjoy the benefits of improving order growth, but I'd be careful about holding this stock through the actual delivery of those orders, even if the prospects for margin leverage and cash flow generation are looking better than in past cycles.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Investing

    The Ups And Downs Of Investing In Cyclical Stocks

    This strategy can be profitable but only if you know when to dump these stocks.
  2. Options & Futures

    Evaluating Country Risk For International Investing

    Investing overseas begins with determining the risk of the country's investment climate.
  3. Bonds & Fixed Income

    Investing In A Unit Investment Trust

    UITs offer professional portfolio selection and a definitive investment objective. Are they right for you?
  4. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  5. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  6. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  7. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  8. Investing News

    5 Stocks to Buy Before Oil Rebounds

    Here are five oil related stocks that you might want to own before oil rebounds.
  9. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  10. Markets

    What Drives Oil Prices?

    Have you ever wondered why oil’s price fluctuates more than the value of other investments?
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  3. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  4. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  5. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  6. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
Trading Center