Oceaneering Int'l: Anatomy Of A 'Non-Miss' Miss

Oceaneering International (OII) ($65.56 at the close)

On a reported basis the company missed by 1 penny in the 4Q. Ok, that's out of the way. However, the "miss" was due to some well above consensus numbers skewing the EPS estimate for the quarter. For the same group of analysts, OII beat on both top and bottom lines for the full year 2007.

Now how can you really miss the quarter and make the year … when it's the fourth quarter?! That math just doesn't work…or some analyst teams can't add 3 actual quarters + 1 estimated quarter and get to a number that makes sense. Don't take my word for it, see the following table:

• Notice that OII's top line exceeded Street estimates by 7% for the quarter and 3% for the year (more on that in a minute).

• Also note that the company had provided guidance and came in near the top of said guidance.

• Taking a look at that fourth quarter, they beat on revenues but missed on earnings. Hmmmm….
  • Subsea Products operating margins took a couple of what I'd characterize as "one time hits" in the quarter, dropping from 21% in the third quarter to 14% in the fourth quarter.
    • The first was the re-manufacture of an umbilical that failed to meet customer specifications in the U.K. and
    • The second was a delayed umbilical construction in Brazil that did not have raw materials cost over runs in the contract when it was originally penned in 2005.
    • While these are not things you want to have happen every quarter they are what I'd call one time. Operating margins have been rising for this segment of their business which accounts for nearly one-third of company revenues.
    • Had margins for this segment remained at 3Q levels, OII would have delivered an extra $11 million of operating income. Tax that at their 35% rate and that yields net income of $52 million or EPS for the quarter of $0.94.
    • I could get a couple more pennies by correcting for an anomalous quarter in their Mobile Offshore Production System unit but I don't think we need to go there as there are going to be "one time items" from time to time.

• 2008 EPS guidance of $3.50 to $3.80 was reiterated (equating to 8 to 17%YoY growth).

• 1Q08 guidance was initiated at $0.65 to $0.75.

• Street Consensus is $0.81 so this is no doubt going to be seen as disappointing.

• Shame on the Street for not paying attention: The company pointed out that 1Q has seasonally been weaker than 4Q EPS for the last 6 years. They have chastised the Street for this in the past and the Street never seems to learn. Recall from above that the Street had $0.82 for the 4Q and was expecting $0.81 for 1Q08…that's not a lot of seasonality.

• The initial reaction to quarterly results was to pummel the shares after skimming the headlines. The message should not be that they missed by a penny but that demand remains strong with visibility into 2009. But to see that, you have to be willing to read.

• One last thing I would point out is that their initial projection for 2007 earnings (way back in late 2006) was a range of $2.60 to $2.90 … and here we are at $3.24. Makes you wonder if these are still "under-promise and over-deliver" kind of guys.

• Conference Call is scheduled for today. If they get dropped on the open I'll be adding another position here.