Investors who want to get involved in the energy sector have to accept that a lot of the driving principles stand on pretty shaky ground. For instance, orders are often considerably more powerful in moving the stocks than actual revenues or margins, and despite its severe deficiencies, EBITDA is generally the favored valuation tool. As a result, talking about oil services company Cameron (NYSE:CAM) as a good or bad stock today depends a lot on what an investor chooses to value.
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Fourth-Quarter Results - Some Good, Some Bad, Some Great
Depending on where you put your emphasis, Cameron's quarter was somewhere between disappointing (and worrisome) and great. Given the stock reaction after the news, Wall Street is going with "good to great."
Revenue rose nearly 20% as reported, and did exceed analyst expectations (on average). Across the board, Cameron saw a double-digit revenue growth in its segments - drilling and production was up 15%, valves and measurement was up 20%, and process and compression was up 35%. There was no one particular star, as all of these results were a bit better than expected.
Margins are where the bad news comes into the story. Gross margin declined 80 basis points from last year and about half a point from the prior quarter, worse than expected. Operating income was likewise disappointing - up 21%, but below expectation and the company's operating margin was a full point shy of analyst targets. Drilling and production was the sole source of the problem, as the other two segments delivered margins at least a point higher than expected. Unfortunately, the two segments combined are still smaller than drilling and production.
SEE: Oil And Gas Industry Primer
Now for the Good - and Bad - News
Where Cameron really stood out this quarter was in its order book. Orders jumped 80% from last year and 50% from the third quarter to a new record of $3.4 billion - more than a quarter higher than analysts were looking for this quarter. Almost all of the upside was in drilling and production, where orders grew 173% over last year. All in all, the company posted a strong 1.4 times book-to-bill.
The bad news is that the company also lowered guidance for the coming year. Against an average earnings per share estimate of $4.05, management projected a range of $3.70 to $3.95. Admittedly, that's about a 5% revision from a company known to go conservative with initial guidance, but it's a little startling relative to the order growth. Given what we've heard from service companies like Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL), Cameron's sizable exposure to the U.S. surface market is likely to blame, but it does suggest that the margin issues in drilling and production won't get better fast.
All of this just throws more mud into what was already a pretty murky outlook for the equipment industry. A lot of 2012 was spent waiting for orders that never really materialized, and I'd be careful in assuming that the strong order pattern is automatically going to continue. Both Cameron and General Electric (NYSE:GE) saw good orders (equipment orders were up 31% at GE, so FMC Technologies (NYSE:FTI) and National Oilwell Varco (NYSE:NOV) likely will, too (NOV is due to report tomorrow as of this writing), but it seems like the large oil and gas players have slowed down their capital plans.
SEE: Can Earnings Guidance Accurately Predict The Future?
Can One Subsea Fix What Ails Cameron?
Although Cameron remains a strong player in surface and subsea equipment for the energy sector, it has to be noted that the company has lost a lot of share over the last five years in areas like blowout preventers and subsea trees. In many cases, rivals such as NOV, FMC, Dril-Quip (NYSE:DRQ) and GE out-engineered, out-marketed and generally outdid Cameron. Those shares have been stabilizing or even improving, but the question still remains as to whether Cameron can really make the best of the long-awaited boom in offshore activity.
Certainly the company's joint venture (JV) with Schlumberger will help. Combining one of the best service providers with one of the best equipment providers is a powerful combination, and this JV could well create a lot of headaches for the likes of GE and FMC in the coming years. That said, it's not going to be a major driver in 2013.
The Bottom Line
As industry order intake throughout 2012 trended below expectations, analysts kept shifting their timelines out to the right - arguing that order growth (and eventually revenue and earnings growth) was a "when, not if" eventuality. I don't necessarily disagree with that viewpoint, but I would just caution investors not to lose sight of concerns such as profitability and market share - stocks like Cameron are doing well now, but this is a painfully cyclical industry.
I do own Cameron shares, and I have to admit I'm mulling over whether to take the quick profits and move along to a new idea. Unfortunately, there's been a seasonal melt-up in the sector and there aren't too many cheap names (and those that are cheaper have some issues). What's more, these stocks have a way of going higher (and lower) than you think they will, and I'm hesitant to sell on such strong order growth.
I believe these shares could trade into the $70s, but I'm wary of revisions to EBTIDA estimates for 2013 and 2014. Likewise, while the sell-side seems to be taking this report in stride, don't be surprised if a few analysts decide to "save" a downgrade for the post-earnings cycle when news is scarce and clients want something, anything, to trade on. In summary, I'm probably going to hang on here. There's still considerable potential in the long-term energy equipment cycle, but nobody should buy this stock with the expectation of smooth sailing or easy money.
At the time of writing, Stephen D. Simpson owned shares of Cameron since 2012.
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