Cameron International (NYSE:CAM) has been a strong player in energy equipment for a while now, but new products for new markets may take the company to another level. While Cameron's relative popularity with the sell-side and institutions ups the risk a bit (it's hardly an undiscovered play), the company may be approaching a period of both expanding profits and expanding multiples.
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A Strong, but not Surprising, Second Quarter
Cameron did more or less as expected for the second quarter, beating by a little bit on the top and bottom lines.
Revenue rose almost 14% from the first quarter, as all of the reporting segments posted double-digit growth. The largest business, drilling and production systems (DPS), grew 11%, while valves and measurement (VM) grew 14% and process and compression (PCS) grew 25%. Profits were also strong, with Cameron reporting 33% sequential operating income growth and 26% sequential EBTIDA growth.
The order book was also quite strong. While almost no sequential growth may seem disappointing, almost nobody expected Cameron to maintain the pace of orders seen in the first quarter. They did, though, and beat expectations soundly with over $1.6 billion in new DPS orders and an overall backlog of $7.5 billion (up 35% from last year).
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From Good to Great?
There are reasons to believe that Cameron isn't done yet.
Petrobras (NYSE:PBR) will be announcing 100 or more tree orders over the next few quarters, and Cameron should win a lot of business here. This is actually a theme across the board - there are many subsea order awards expected over the next six to 12 months, and Cameron is expected to figure prominently in them. There's obviously a "but" to this; with expectations already calling for Cameron to win a lot of business, any inroads from General Electric (NYSE:GE) or FMC (NYSE:FTI) could hit the stock hard.
That said, I like the company's prospects to not only grow within existing markets, but to reap growth from acquisitions and new product development. Subsea separation technology to compete with FMC could lead to new opportunities in floating production storage and offloading (FPSO), while a new drill ship product could give customers an alternative to National Oilwell Varco (NYSE:NOV). Last and not least, with all of the pipeline building going on across North America, I wonder if there are incremental opportunities for Cameron as well - I'm not suggesting the company will supplant Flowserve (NYSE:FLS) or SPX (NYSE:SPW), but perhaps there is growth here nonetheless.
Certainly there are ample risks to counter-balance this growth potential. Competing against National Oilwell has not historically been a ticket to easy success, and GE is strongly committed to growing its energy equipment business. Cameron is a good company with good products, though, so I do not expect the company to have to resort to price competition to keep or win business.
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The Bottom Line
Even with a nine times multiple to 2013 EBTIDA, Cameron shares don't necessarily look dirt cheap with a fair value in the $60s. Keep in mind, though, that nine times is the median multiple and it has gone into the double digits during past bullish cycles. What's more, with Cameron's strong OUS exposure (where a lot of the growth in energy exploration and production is likely to come in the next few years), the risk may be marginally lower.