In this article, let's take a look at Cameron International Corp (CAM, Financial), a $9.43 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.
Oil Price
The company´s main risk is lower oil prices, because this makes oil producers reduce their capital spending budgets and also affects its revenue growth. This is because the business is highly correlated with crude price, which is an important player in this industry. So, when looking at this commodity, we can see that for example the West Texas Intermediate (WTI) crude price traded in the range of $45 and $54 per barrel in the first quarter of the year.
Earnings Surprise
Last quarter, the company´s net income increased to $253 million, up from $221 million during the fourth quarter the year before. Cameron had a good 11.67% positive earnings surprise. This is one of the most important things in the stock market, for its impact on the stock price, not only in the immediate price, but also in the future price.
In the next table we can see the earnings estimates provided by Yahoo Finance.
| Earnings Est | Current Qtr. | Next Qtr. | Current Year | Next Year |
| Ă‚ | mar-15 | jun-15 | Dec 15 | Dec 16 |
| Avg. Estimate | 0.70 | 0.79 | 2.97 | 2.72 |
| No. of Analysts | 30 | 30 | 34 | 34 |
| Low Estimate | 0.43 | 0.67 | 1.93 | 2.00 |
| High Estimate | 0.88 | 1.12 | 3.50 | 3.50 |
| Year Ago EPS | 0.75 | 1.00 | 4.14 | 2.97 |
To put it in simple words, with the fall in crude price, companies are demanding less drilling equipment, and this clearly affects Cameron’s revenues, earnings and cash flows. This was the situation prevailing in the first quarter of the year, so we don´t expect a high positive earnings surprise for this period.
A few days ago, Raymond James (RJF, Financial) analyst J. Marshall Adkins cut their ratings on the company to Outperform from Strong Buy. On the other hand, Marathon Oil (MRO, Financial) has been upgraded to Buy from Neutral at BofA Merrill Lynch (BAC, Financial).
With respect to the stock price, it has dropped by about 17% in 2014 and in a year-to-date basis the returned is negative by 2.3%, despite the large increase achieved the last days of January 2015.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 12.3x, trading at a discount compared to an average of 26.6x for the industry. To use another metric, its price-to-book ratio of 2.2x indicates a premium versus the industry average of 1.29x while the price-to-sales ratio of 0.96x is below the industry average of 0.99x. Two metrics indicate the stock is relatively undervalued, and so subject to a potential buy.
Hedge Funds Movements
JANA Partners, Leon Cooperman (Trades, Portfolio) and Paul Singer (Trades, Portfolio) sold significant stakes in Cameron during the fourth quarter of 2014. On the other side, Israel Englander´s Millennium Management held 5.69 million shares, up by 1412% on the quarter; the value of the stake amounted to $283.99 million.
Manning & Napier Advisors, Inc holds 7,044,305 shares, as of the end of March 2015, up by 2.5% from the previous quarter, in which the fund disclosed a position with 6,877,327 shares.
Final Comment
Cameron is a 60% partner with Schlumberger (SLB, Financial) and we think this is a major catalyst in the future. Looking at the principal risks, we must highlight the direct exposure to oil and gas prices. Lots of analysts are saying that is no expectation for oil price recovery in the short term, so this will hurt the oil drilling equipment maker´s profit.
Disclosure: Omar Venerio holds no position in any stocks mentioned
