In the larger context of offshore energy equipment companies, Cameron's (NYSE:CAM) weak second quarter wasn't unique. Even so, this was the second straight weak quarter at Cameron, and with these stocks trading off of orders (which came up about 20% light) that's a problem. While I continue to believe that Cameron is gearing up for a period of significant revenue, margin, and order growth, I won't pretend that execution risks are now front and center with this story. So though the shares continue to look undervalued, the above-average likely volatility doesn't make them suitable for all investors.
A Disappointing Quarter, But Not A Disaster
Cameron reported annual and sequential revenue growth of 11% and 8%, respectively, for the second quarter and that was only slightly below expectation. Both the drilling/production and valves/measurement units saw sequential growth (13% and 3%, respectively), while the process/completion business was down both year-on-year and quarter-on-quarter (-7% and -4%). 
Although revenue was higher, margins were so-so. Some of this can be tied to the OneSubsea JV with Schlumberger (NYSE: SLB), but the results are what they are. Gross margin declined 40bp on both an annual and sequential basis, while operating income rose 5% and 11% for the quarter. EBITDA (the preferred metric for operating performance) rose 6% and 9%, missing expectations by about 4% and leading to a four-cent operating miss. The process/completion business was notably weak, though this business has long been the margin laggard for Cameron.

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Is It All About Timing?
The big negative takeaway for the quarter was the shortfall in orders. Orders declined 9% from last year and more than one-third from the prior quarter, missing expectations by around 20%-25%. Every segment saw a sequential decline in margins, as the company couldn't repeat the large orders that it booked in the first quarter.
Cameron blamed the order book performance on delays in large orders, and that's consistent with what others including FMC Technologies (NYSE:FTI), Dresser-Rand (NYSE:DRC), and Forum Energy Technologies (NYSE: FET) have been saying as well. What's more, management continues to believe that orders will come in before the year is up. To that end, Cameron booked two sizable orders in July – a $540 million contract for OneSubsea from Chevron (NYSE:CVX) for work in the North Sea and a $550 million CAMSHALE deal with BHP Billiton (NYSE: BHP). It's also worth noting, I think, that Cameron's surface orders were up about 40% in the first half of the year despite a weak North American rig environment.
Execution Now Up For Grabs
So, there's a lot left for the company to do this year. Total (NYSE: TOT) and Eni (NYSE:E) are both expected to make orders this year (for Moho-Bilondo and Block 15/06, respectively, and it is my understanding that these projects require subsea boosting technology. With FMC and OneSubsea the only ones who can really do that job right, I'm very interested to see how these awards go. FMC has been gaining a lot of share and Cameron needs to reprove that it can hold its own, particularly with the Schlumberger JV theoretically making them a more attractive player.
I think it's also worth noting that Cameron could still deliver a good 2013 on balance. Given the company's revenue recognition policies, the fourth quarter should be a big one for Cameron, and that may be where a lot gets decided about this stock – if Cameron comes through, this period will just look like another lull before a move higher, but if Cameron disappoints it will be hard to argue for a high multiple going into 2014.
The Bottom Line
With revenue potential of $250 million per rig and multiple subsea projects on the way, I continue to believe that Cameron is looking at a lot of offshore business in the coming years, not to mention a recovery in the North American surface market. This quarter's disappointment has upped the risk and uncertainty again, but I believe the business is out there for Cameron to do well – now management has to re-prove to the Street that it can go out there and get it (and do it for attractive margins).

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Although a lot of analysts have already moved on to 2014 estimates for Cameron, I'm still valuing the stock on the basis of 12-month forward EBITDA. Using a 9.5x multiple (slightly above the historical average), that works out to a fair value of $69 today. Should the company deliver the orders and margins that the bulls still believe in, a double-digit target on 2014 EBITDA estimates could ultimately take these shares into the $75-$85 range.
Disclosure – At the time of writing, the author owns shares of CAM.

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