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Summary

  • With capacity improvement plans underway, management doesn't expect to lose this momentum.
  • On the strength on OneSubsea venture with Schlumberger and a solid backlog, Cameron stock should command a fair market value north of $70 per share.
  • My $70 target is $3 shy than the median target of $73 and $13 shy of the highest analyst target of $87.

With shares of oilfield services company Cameron International (NYSE:CAM) soaring to a new 52-week high recently, it demonstrates my belief that the company's recent struggles have been an aberration, to which the Street overreacted. Recall, back in November, Cameron stock dropped 15% following a downgrade from UBS analysts who hated the numbers Cameron posted in its third quarter.

Following that decline, I told investors that Cameron had just become the best energy value on the market. UBS cited potential weak revenue and margins as reasons for the downgrade. I'm not suggesting that these aren't important factors, but unlike other sectors, revenue and margins aren't the metrics that drive energy companies forward. What's really important to Cameron, and for that matter this entire sector, are the volume of orders received. And this was a metric, of which I noticed several quarters ago, that Cameron was still perfuming well.

Since then, the stock is up more than 20%. And after the company's dominant first-quarter performance, Cameron investors should feel encouraged that management has positioned this company well for long-term recovery in energy.

Helped by a strong backlog, which stood at a record $11.2 billion, up more than 13% from the year-earlier level of $9.91 billion, Cameron posted an 18% jump in quarterly revenue, totaling $2.43 billion. This beat Street estimates by roughly 2%. Note, revenue was projected to be $2.39 billion for the quarter. This marks the fourth consecutive quarter of revenue growth, which has been strong due to the company's Drilling & Production Systems segment (DPS).

Earnings -- excluding charges and discontinued operations -- were also ahead of expectations at 75 cents per share, which exceeded last year's mark of 69 cents by close to 9%. The Street was looking for 72 cents. Following the 49% surge in net income in the fourth quarter, this now makes two consecutive quarters of earnings growth.

The company is benefiting from strong DPS performance, which generated operations revenues of $1.7 billion, an increase of 34.4% year over year. Equally impressive was the 26% surge in segment EBITDA, which reached $249 million. This strong performance was helped (in part) by better-than-expected demand in OneSubsea, a joint venture formed by Cameron and Schlumberger (NYSE:SLB), which they own 60/40, respectively. But it wasn't all good news.

The Valves & Measurement (V&M) business posted revenue of $492.3 million, down 5.6% year over year. The segment EBITDA decreased 14.0% year over year to $106.0 million. The negative comps was due to weak infrastructure activity levels throughout the world. Likewise, the Process & Compression Systems (PCS) segment posted a 13% decline in revenues. With some hiccups in operation, segment EBITDA was down 11% year over year to $22.9 million.

Despite these issues, Cameron received orders totaling $2.4 billion, which is higher than expectations. This means that the company has a healthy commitment of revenue to help drive growth for the rest of the year. As such, management revised its 2014 earnings per share (from continuing operations) guidance to $3.80-$4.10, which is roughly 6% higher than prior estimates. Meanwhile, the second quarter profitability is likely to be between 84 cents and 89 cents.

All told, while this wasn't a blowout quarter, it does demonstrate that management has a strong pulse on this business. Given the strong order performance, not to mention the significant backlog, these shares should continue their uptrend. Patient investors, especially those that bought in back in November, will continue to do well here. And assuming that management can shore up both the Compression Systems and Valves segment, Cameron's growth has only just begun.

With capacity improvement plans underway, management doesn't expect to lose this momentum. On the strength on the OneSubsea venture with Schlumberger and solid backlog, Cameron stock should command a fair market value north of $70 per share in the next 12 to 18 months, which is $3 shy of the median target of $73 and $13 shy of the highest analyst target of $87.

Source: Why Cameron International Is Heading To $70