In this article, let's take a look at Cameron International Corp (CAM, Financial), a $13.65 billion market cap company, which is a leading international manufacturer of oil and gas blowout preventers, flow control valves, surface and subsea production systems and related oilfield services products.
Main drivers
The company differentiates from peers due to its vertical strategy that ranges from upstream to downstream. It plans to extend its reach into the deepwater market that is an important driver of revenues.
Talking about drivers, the OneSubsea partnership with Schlumberger is a principal one. The deal helps the firm with experience and certain capabilities to gain access to Schlumberger's customer base. As a result, we expect the company to have strong growth because producers will increase tap OneSubsea for deep-water projects.
The firm can divest in some units that are not the core business. It has recently completed a sale of its reciprocating compression business to General Electric (GE, Financial) for $550 million. Also, this year will probably have another sale in the compression business. With the cash it can generate, it can use it in share repurchases program or start a dividend.
Acquisitions
In 2009, it acquired the former Natco Group in search of separating and processing the businesses. Looking forward, the firm can have acquisition spending of $2 billion between the years 2015 and 2018.
Principal risk
The principal risk in this business is lower oil prices that could make oil producers reduce their capital spending budgets and so lead to lower revenue growth.
Revenues, Margins and Profitability
Looking at profitability, revenues grew by 19.55% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.02 vs $0.55). The net income increased by 57.9% when compared to the same quarter one year prior, rising from $140.00 million to $221.00 million.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| CAM | Cameron International | 12.71 |
| OII | Oceaneering International | 19.66 |
| CLB | Core Laboratories NV | 148.88 |
| DRC | Dresser-Rand Group Inc | 10.06 |
| HAL | Halliburton Co | 20.68 |
| Â | Industry Median | 8.47 |
The company has a current ROE of 12.71% which is higher than the industry median and the one exhibit by Dresser-Rand Group Inc (DRC, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Oceaneering International (OII, Financial) and Halliburton (HAL, Financial) could be the options. Core Laboratories (CLB, Financial) has a tremendously attractive ROE.
It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 20.3x, trading at a discount compared to an average of 21.8x for the industry. To use another metric, its price-to-book ratio of 2.7x indicates a premium versus the industry average of 1.63x while the price-to-sales ratio of 1.4x is above the industry average of 1.25x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,081, which represents a 12.6% compound annual growth rate (CAGR).
Final comment
As outlined in the article, the company is a 60% partner with Schlumberger and we think this is a major catalyst in the upcoming future. Further, divesting in some businesses will raise capital and could offer investors attractive cash.
The PE relative valuation and the return on equity that significantly exceeds the industry average, make me feel bullish on this stock.
Hedge fund gurus like Paul Singer (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as RS Investment Management (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Manning & Napier Advisors, Inc.
Disclosure: Omar Venerio holds no position in any stocks mentioned
