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Over the past couple of years, the Oil and Gas equipment service industry has been evolving rapidly. With the introduction of new fracking techniques, increased safety regulations and domestic construction demands showing no signs of slowing down, these factors have given the industry a boost. One of the companies looking to capitalize on this growth is Cameron International Corporation (CAM).

In the article below, I will look at the Cameron International past profitability, debt and capital, and operating efficiency. Based on this information, we will get to see the company's sales, returns, margins, liabilities, assets, returns and turnovers. We will get an understanding of how the company has grown over the past few years, thus keeping up with industry trends and what to expect in the future.

All numbers sourced from Company Webpage and Morningstar.

Profitability

Profitability is a class of financial metrics used to assess a business's ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net Income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money, and gauge the quality of the reported profits.

  • Net Income 2010 = $563 million.
  • Net Income 2011 = $522 million.
  • Net Income 2012 = $751 million.

Over the past three years Cameron International's net profits have increased from $563 million in 2010 to $751 million in 2012. This signifies a increase of 33.39% in earnings over the past 3 years.

  • Operating Cash Flow 2010 = $733 million.
  • Operating Cash Flow 2011 = $651 million.
  • Operating Cash Flow 2012 = $1.028 billion.

Operating cash flow is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three years, the company's operating cash flow has also increased. Cameron International's operating cash has increased by 40.24%.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net Income 2010 = $563 million.
    • Net Income 2011 = $522 million.
    • Net Income 2012 = $751 million.
  • Total asset growth

    • Total Assets 2010 = $8.005 billion.
    • Total Assets 2011 = $9.362 billion.
    • Total Assets 2012 = $11.158 billion.
  • ROA - Return on assets

    • Return On Assets 2010 = 7.03%.
    • Return On Assets 2011 = 5.58%.
    • Return On Assets 2012 = 6.73%.

Over the past three years, Cameron International's ROA has decreased from 7.03%. in 2010 to 6.73% in 2012. This indicates that the company is making less money on its assets than it did in 2010.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2010

  • Operating Cash Flow 2010 = $733 million.
  • Net Income 2010 = $563 million.

2011

  • Operating Cash Flow 2011 = $651 million.
  • Net Income 2011 = $522 million.

2012

  • Operating Cash Flow 2012 = $1.028 billion.
  • Net Income 2012 = $751 million.

Over the past three years, the operating cash flow has been higher than the net income. This indicates that the company is not artificially creating profits by accounting anomalies such as inflation of inventory.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total Assets

    • Total Assets 2010 = $8.005 billion.
    • Total Assets 2011 = $9.362 billion.
    • Total Assets 2012 = $11.158 billion.
    • Equals and increase of $3.153 billion
  • Total Liabilities

    • Total Liabilities 2010 = $3.613 billion.
    • Total Liabilities 2011 = $4.654 billion.
    • Total Liabilities 2012 = $5.592 billion.
    • Equals and increase of $1.979 billion

Over the past three years, Cameron International has acquired more total assets than total liabilities. This indicates that the company has not been financing its assets through debt. Over the past three years, the company's total assets increased by $3.153 billion, while the total liabilities increased by $1.979 billion.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current Assets/Current liabilities

  • Current Assets

    • Current Assets 2010 = $4.933 billion.
    • Current Assets 2011 = $5.829 billion.
    • Current Assets 2012 = $6.911 billion.
  • Current liabilities

    • Current liabilities 2010 = $2.574 billion.
    • Current liabilities 2011 = $2.680 billion.
    • Current liabilities 2012 = $3.169 billion.
  • Current Ratio 2010 = 1.92.
  • Current Ratio 2011 = 2.18.
  • Current Ratio 2012 = 2.18.

Over the past three years, Cameron International's current ratio has increased from 1.92 in 2010 to 2.18 in 2012. This indicates that the company has more of the ability to pay off its short-term obligations than it did three years ago. As the most recent number is well above 1, this signifies strength and indicates that the company would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2010 Shares Outstanding = 248 million.
  • 2011 Shares Outstanding = 249 million.
  • 2012 Current Shares Outstanding = 248 million.

Over the past three years, the number of company shares have remained relatively the same. As the shares have remained the same this indicates that the company is not issuing shares to raise capital.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross Margin 2010 = $1.922 billion / $6.135 billion = 31.33%.
  • Gross Margin 2011 = $2.121 billion / $6.959 billion = 30.48%.
  • Gross Margin 2012 = $2.484 billion / $8.502 billion = 29.22%.

Over the past three years, the gross margin has decreased. The ratio has decreased from 31.33% in 2010 to 29.22% in 2012.. As the margin has decreased, this indicates the company has been slightly less efficient.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2010 = $6.135 billion.
    • Revenue 2011 = $6.959 billion.
    • Revenue 2012 = $8.502 billion.
    • Equals an increase of 38.58%.
  • Total Asset growth

    • Total Assets 2010 = $8.005 billion.
    • Total Assets 2011 = $9.362 billion.
    • Total Assets 2012 = $11.158 billion.
    • Equals an increase of 39.38%.

As the revenue growth has slightly less than the asset growth on a percentage basis, this indicates that the revenue growth did not keep up its asset growth.

Based on the nine different criteria above, Overall Cameron International is showing strong results. The company is showing weakness in its gross margins but is showing strength in working capital, TL&A and profitability. Based on the above criteria, Cameron International is showing that it is a solid company and has been able to take advantage of the growth in the industry over the past couple of years.

Analysts at Bloomberg Businessweek are estimating substantial growth for Cameron International over the next few years. They are estimating Cameron International's revenue to grow to $9.6 billion for FY 2013 and $10.9 billion for FY 2014. They are also estimating Cameron International to have an EPS at $4.05 for FY 2013 and $5.12 in FY 2014.

Valuation

B. Annual growth rate

(A / P) ^ (1 / T) - 1 = R

(5.12 / 2.27) ^ (1 / 5) - 1 = R

R = 17.66%

Earnings per share average growth rate over the 3 past years and estimated 2 years forward = 17.66%

Current PE Ratio = 21.64 (Google Finance)

21.64 / 17.66 = 1.00

PEG Ratio = 1.23

A current PEG ratio of 1.23 based on an EPS average growth rate from 2010 to 2014 indicates that based on the next few years estimates the stock is currently at overvalued.

Based on the information above, Cameron International is in an industry that is poised for growth over next few years. Cameron International has indicated strong financial strength over the past 3 years and looks to continue it its strength and growth in profitability for the next couple of years. Based on the PEG ratio of 1.23 Cameron International looks to be overvalued at this point but if the stock pulls back that would be an excellent opportunity to invest in a company with a strong balance sheet and excellent growth opportunities moving forward.

Source: Why Cameron International Is A Buy On Weakness