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With the rapid evolution occurring in the oil and gas equipment service industry, FMC Technologies, Inc. (NYSE:FTI) looks to be poised to capitalize on these changes. As the introduction of new fracking techniques, increased safety regulations and OPEC predicting world oil consumption reaching 92.9 mb/d by 2016, these factors will give the industry a boost. As FMC Technologies Incorporated is situated very well to capitalize on these changes and growth any pullback in price would offer an excellent opportunity to invest.

FMC Technologies, Inc. is a leading global provider of technology solutions for the energy industry. FMC Technologies designs, manufactures and services technologically sophisticated systems and products such as subsea production and processing systems, surface wellhead systems, high pressure fluid control equipment, measurement solutions, and marine loading systems for the oil and gas industry.

In the article below, I will look at FMC Technologies 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 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 = $376 million.
  • Net income 2011 = $400 million.
  • Net income 2012 = $430 million.

Over the past three years FMC Technologies net profits have increased from $376 million in 2010 to $430 million in 2012. This signifies a increase of 14.36% in earnings over the past 3 years.

  • Operating cash flow 2010 = $552 million.
  • Operating cash flow 2011 = $562 million.
  • Operating cash flow 2012 = $605 million.

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. FMC Technologies operating cash has increased by 9.60%.

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 = $376 million.
    • Net income 2011 = $400 million.
    • Net income 2012 = $430 million.
  • Total asset growth

    • Total assets 2010 = $3.644 billion.
    • Total assets 2011 = $4.271 billion.
    • Total assets 2012 = $5.903 billion.
  • ROA - Return on assets

    • Return on assets 2010 = 10.32%.
    • Return on assets 2011 = 9.37%.
    • Return on assets 2012 = 7.28%.

Over the past three years, FMC Technologies ROA has decreased from 10.32% in 2010 to 7.28% 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 = $552 million.
  • Net income 2010 = $376 million.

2011

  • Operating cash flow 2011 = $562 million.
  • Net income 2011 = $400 million.

2012

  • Operating cash flow 2012 = $605 million.
  • Net income 2012 = $430 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 = $3.644 billion.
    • Total assets 2011 = $4.271 billion.
    • Total assets 2012 = $5.903 billion.
    • Equals and increase of $2.259 billion
  • Total liabilities

    • Total liabilities 2010 = $2.333 billion.
    • Total liabilities 2011 = $2.846 billion.
    • Total liabilities 2012 = $4.066 billion.
    • Equals and increase of $1.733 billion

Over the past three years, FMC Technologies 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 $2.259 billion, while the total liabilities increased by $1.733 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 = $2.345 billion.
    • Current assets 2011 = $2.788 billion.
    • Current assets 2012 = $3.488 billion.
  • Current liabilities

    • Current liabilities 2010 = $1.495 billion.
    • Current liabilities 2011 = $2.233 billion.
    • Current liabilities 2012 = $1.970 billion.
  • Current ratio 2010 = 1.57.
  • Current ratio 2011 = 1.25.
  • Current ratio 2012 = 1.77.

Over the past three years, FMC Technologies current ratio has increased from 1.57 in 2010 to 1.77 in 2012. As the number has increased and 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 = 245 million.
  • 2011 shares outstanding = 243 million.
  • 2013 current shares outstanding = 237 million.

Over the past three years, the number of company shares have decreased. The amount of common shares have decreased from 245 million in 2010 to the current number of 237 million.

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 = $1.052 billion / $4.126 billion = 25.50%.
  • Gross margin 2011 = $1.133 billion / $5.099 billion = 22.22%.
  • Gross margin 2012 = $1.319 billion / $6.151 billion = 21.44%.

Over the past three years, the gross margin has decreased. The ratio has decreased from 25.50% in 2010 to 21.44% in 2012. As the margin has decreased, this indicates the company has been slightly less efficient than it was in 2010.

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 = $4.126 billion.
    • Revenue 2011 = $5.099 billion.
    • Revenue 2012 = $6.151 billion.
    • Equals an increase of 49.08%.
  • Total Asset growth

    • Total assets 2010 = $3.644 billion.
    • Total assets 2011 = $4.271 billion.
    • Total assets 2012 = $5.903 billion.
    • Equals an increase of 61.99%.

As the revenue growth has increased less than the assets on a percentage basis, this indicates that the company's sales have not kept up with the assets the company has acquired.

Based on the nine different criteria above, FMC Technologies is showing good results. There has been a decrease in some areas of the company. The ROA, gross margin and the asset turnover ratio for FMC Technologies have decreased over the past 3 years. These ratios indicate that the company is not making as much money off its assets as it did in 2010. Having stated that, the company's other ratios look very strong. Based on the above criteria, FMC Technologies 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.

Looking forward

Over the next few years the company looks to maintain its growth. According to the company's 10-K report, there is a strong backlog of orders on the books. The chart below indicates the growth of backlog orders from 2011 to 2012, but the company is expecting to create a large amount of revenue in the future based off its 2012 backlog orders.

 

 

 

 

 

(In millions)2012 2011
Subsea Technologies$4,580.1  $4,090.0 
Surface Technologies500.8  577.7 
Energy Infrastructure298.0  226.9 
Intercompany eliminations(1.1) (18.2)
Total order backlog$5,377.8  $4,876.4 

In 2012, the Subsea Technologies segment of the company appears to have a very strong amount of backlog orders. As of December 31, 2012 the company is reporting to have Subsea backlog orders of $4.6 billion. This was composed from various subsea projects such as "BP's Block 18 (NYSE:BP); BG Norge's Knarr; Chevron's Wheatstone (NYSE:CVX); CNR International's Baobab (NYSE:CNQ); ExxonMobil's Hibernia (NYSE:XOM); Hess' Tubular Bells (NYSE:HES); LLOG Exploration's Delta House; Petrobras' Tree and Manifold Frame Agreement (NYSE:PBR), Pre-Salt Tree Agreement and Congro and Corvina; Shell's BC-10, Bonga and Prelude (NYSE:RDS.A); Statoil's Statfjord Workover System (NYSE:STO), Gullfaks South and Oseberg Delta; Total's CLOV (NYSE:TOT); and Woodside's Greater Western Flank." The company is anticipating substantial growth from this backlog, as they are expecting to convert 55% to 65% of this backlog into revenue in 2013.

To support the above statement, analysts at MSN Money are estimating growth for FMC Technologies over the next few years. They are estimating FMC Technologies to have an EPS at $2.18 for FY 2013 and $2.95 in FY 2014. As well, Finviz's list of price targets for FMC Technologies is bullish. According to Finviz, analysis have price targets ranging from $48.00 to $58.00.

22-Feb-13UpgradeDahlman RoseHold → Buy 
14-Feb-13ReiteratedUBSBuy$55 → $58
14-Feb-13ReiteratedRBC Capital MktsSector Perform$47 → $55
14-Feb-13ReiteratedBarclaysEqual Weight$50 → $48

Valuation

B. Annual growth rate

  • EPS 2010 = $1.54
  • EPS 2011 = $1.66
  • EPS 2012 = $1.79
  • EPS 2013 = $2.18 (Estimate MSN Money)
  • EPS 2014 = $2.95 (Estimate MSN Money)

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

(2.95 / 1.54) ^ (1 / 5) - 1 = R

R = 13.88%

Earnings per share average growth rate over the 3 past years and estimated 2 years forward = 13.88%

Current PE Ratio = 28.96 (MSN Money)

28.96 / 13.88 = 2.09

PEG Ratio = 2.09

The current PEG ratio of 2.09 based on an EPS average growth rate from 2010 to 2014 indicates that based on the next few years estimates the stock is currently over valued at this point.

Based on the above analysis, FMC Technologies has shown strong financial strength over the past 3 years. FMC Technologies is situated in a sector poised for growth and looks to continue its strength and growth in profitability for the next couple of years. As the PEG ratio of 2.09 indicates, FMC Technologies is currently over valued, but the current price target of range of $48.00 to $58.00 suggests there could be some upside moving forward. If the stock pulls back into the mid to low $40's, this would provide an outstanding opportunity to invest in a company in a very strong sector with a good balance sheet and excellent growth opportunities moving forward.

Source: FMC Technologies: Capitalizing On Growth In Oil Consumption