In this article, let's take a look at Cameron International Corp. (CAM, Financial), a $8.67 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 risk
In simple words, the main risk is lower oil prices, and oil producers naturally reduce their capital spending budgets. The business is strongly correlated with the price of crude, which is a key input in the business. The stock price dropped by about 9% on a year-to-date basis, and it returned a negative 38% in the past 12 months.
Cloudy outlook
Last quarter, the company´s results were better than expected. Although earnings per share decreased by 8% when compared to the second quarter one year before, they came in at $0.60, beating the estimate of $0.47. Revenue declined 14% to $1.3 billion, reflecting a slowdown in all business lines. Due to cost reductions, gross profit increased 3% year over year, and gross profit margin rose to 34.2%.
Cameron has had a history of positive earnings surprises. This is one of the most important things in the stock market, for it impacts the stock price not only in the immediate term but also in the future.
In the next table, we can see the earnings estimates provided by Yahoo!Ă‚ Finance.
| Earnings History | Sep-14 | Dec 14 | Mar-15 | Jun-15 |
| EPS Est | 1.09 | 1.20 | 0.70 | 0.77 |
| EPS Actual | 1.17 | 1.34 | 0.91 | 0.83 |
| Difference | 0.08 | 0.14 | 0.21 | 0.06 |
| Surprise % | 7.30% | 11.70% | 30.00% | 7.80% |
As we can see, expected EPS had a median of 14%. The company's guidance for the third quarter is promising, earnings between $0.50 and $0.55 per share. Due to the actual scenario of crude prices, companies are demanding less drilling equipment, and this clearly affects Cameron’s revenues, earnings and cash flows. So it will be very difficult for Cameron to beat expectations in the future quarters.
In a report published recently, RBC Capital analyst Kurt Hallead upgraded the rating to Outperform from Sector Perform and has raised the price target from $55 to $65. Further, Global Hunter upgraded to Buy from Accumulate, with a $58 price target. The decision was based in a leadership position in North American while expecting margins to continue attractive.
Relative valuation
In terms of valuation, the stock sells at a trailing P/E of 13.35x, a premium compared to a median of 13.2x for the industry. To use another metric, its price-to-book ratio of 2.0x indicates a premium versus the industry average of 0.84x while the price-to-sales ratio of 0.90x is above the industry average of 0.68x. The metrics indicate the stock is relatively overvalued and subject to a potential sell.
Bearish funds' sentiments
Although Ken Griffin has reduced his position by 2% in the second quarter of 2015, the guru is the major shareholder, holding 3,930,560 shares valued at $205.8 million. More bearish were Jim Simons (Trades, Portfolio) and David Dreman (Trades, Portfolio); both of them sold out the stock.
Further, Mario Gabelli (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio) and Manning & Napier Advisors Inc. sold significant stakes in Cameron during the second quarter. On the other side, Ray Dalio (Trades, Portfolio) held 76,465 shares, up 494% in the quarter. But he was not the only one;Ă‚ Steven Cohen (Trades, Portfolio), and Pioneer Investments (Trades, Portfolio) upped their stakes 19.83% and 1.11%, respectively.
Final comment
Cameron is a 60% partner with Schlumberger (SLB, Financial). This is a major catalyst in the future.
The company has direct exposure to oil and gas prices. Some analysts think that oil prices will not recover in the short term, hurting Cameron´s profit.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
