Balanced View on FMC Technologies


We have maintained our Neutral recommendation on oil drilling equipment maker FMC Technologies Inc. (FTI) considering its overall stability and steady growth outlook.

Incorporated in 2000, Houston, Texas-based FMC Technologies is a leading manufacturer and supplier of technology solutions for the energy industry. The company, which operates 27 manufacturing facilities in 16 countries, is engaged in the designing, producing and servicing technologically sophisticated systems and products such as subsea production and processing systems, surface wellhead production systems, high pressure fluid control equipment, measurement solutions, and marine loading systems for the oil and gas industry. FMC Technologies divides its business into three segments: Subsea Technologies, Surface Technologies and Energy Infrastructure.

FMC Technologies is particularly well positioned in the subsea systems market, where it competes with Cameron International Corp. (CAM). Subsea activity represents the company’s largest and fastest-growing business, accounting for about 70% of revenue. Subsea products have seen an increase in interest, and we expect earnings in this segment to strengthen – especially due to FMC Technologies’ leadership position in subsea production systems, including subsea trees, controls and manifold and tie-in systems.

Following the Gulf of Mexico oil spill, we expect the company to benefit from the near-term requirements for better offshore safety equipments. Stricter regulations on drilling could translate into enhanced opportunities for subsea equipment suppliers like FMC Technologies.

With a major portion of its total revenue coming from outside the U.S., FMC Technologies’ international operations are expected to be a key growth driver going forward and will play an offsetting role to the relatively soft domestic drilling scene. We have identified Latin America, Asia Pacific and the Middle East as the key markets in this regard.

FMC Technologies’ strong backlog, which now stands at nearly $5.6 billion, not only reflects steady demand from its customers but also offers long-term earnings and cash flow visibility. This enables the company to navigate uncertainty better than many of its peers.

However, we remain worried on valuation grounds. At current multiples – significantly higher than peers – we have a difficult time justifying a sufficient enough potential return to support an Outperform rating. Moreover, with markets remaining competitive and pricing likely to be weak, we believe FMC Technologies shares are fairly valued and expect them to perform in line with the broader market.

As a result, our long-term total return expectation for FMC Technologies remains rather muted. We do not see any significant price upside for the shares in the next few quarters and expect the company to grow at a somewhat more conservative and sustainable pace. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).

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