Following our approach to share pricing of energy companies we present a model for Cameron International (NYSE: CAM). As always, the CAM model is based on our general concept that the evolution of any share price can be decomposed into a weighted sum (or difference) of two CPI/PPI components. Originally, this pricing concept was developed four years ago by predicting share prices for a few energy companies. We used the core CPI to represent an energy independent (but dynamic) reference to the headline CPI. The latter is used as a proxy to the economy-wide energy price, which is also related to oil price and the prosperity of energy companies. We assumed that the difference between these two CPIs might best express the energy pricing power relative to all other goods and services.
Cameron International Corporation provides flow equipment products, systems, and services worldwide. Here we demonstrate that the time history of a CAM share price, CAM(t), can be accurately approximated by a linear function of the difference between the core CPI, CC, and the headline CPI, C, in the United States. We test two more pricing models with the consumer price index of energy, E, and the difference between two PPI components: the overall PPI and the PPI of oil, OIL. Our goal is to find the model which describes the observed prices the best according to the LSQ criterion.
Three models below have been estimated together with their standard model errors for the same period between July 2003 and February 2012:
CAM(t)= 2.72C(t) - 3.03CC(t) + 3.75(t-2000) + 38.40; sterr=$5.11 (1)
CAM(t)= 0.56CC(t-9) + 2.5E(t) - 0.25(t-2000) - 134.20; sterr=$4.95 (2)
CAM(t)= -0.12PPI(t-9) +0.12OIL(t) + 3.27(t-2000) - 30.55; sterr=$4.12 (3)
Model (3) provides the best explanation of the variability in the CAM share price since July 2003. The PPI of oil evolves in sync with the share, which grows proportionally to oil price. The PPI slope is negative and thus the growth in producer prices suppresses the growth in CAM price. Figures 1 through 3 clearly indicate that the closing price in February 2012 was estimated accurately and we do not expect any correction beyond the natural evolution according to (3).
Figure 1. The observed CAM price and that predicted from the core and headline CPI.
Figure 2. The observed CAM price and that predicted from the energy index, E, and the headline CPI.
Figure 3. The observed CAM price and that predicted from the PPI of oil, OIL, and the overall PPI. The high and low monthly prices represent the uncertainty of the observed price.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CAM over the next 72 hours.