On Dec 6, 2013, we retained our Neutral recommendation on oil drilling equipment maker FMC Technologies Inc. (FTI). Our investment thesis is supported by a Zacks Rank #3 (Hold).
Why the Reiteration?
The company has a diversified product portfolio, specialty service capabilities and proprietary technological expertise. Other positives for FMC Technologies include a strong backlog position, growing international operations and a favorable outlook for subsea activity levels. However, we think the current valuation is fair and adequately reflects the company’s future growth prospects.
FMC Technologies is particularly well positioned in the subsea systems market. It is the company’s largest and fastest-growing business, accounting for about two-thirds 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.
Order flow and backlog for subsea products and services will continue to be healthy and trend higher. FMC Technologies remains poised to receive a large share of big contracts moving forward. We are further encouraged by the company’s recent subsea equipment deals with industry giants like Brazil's state-run energy powerhouse Petroleo Brasileiro S.A., or Petrobras (PBR) and Europe’s largest oil company Royal Dutch Shell plc (RDS.A).
FMC Technologies’ strong backlog, which now stands at more than $7 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 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 FTI shares are fairly valued and expect them to perform in line with the broader market.
Stocks That Warrant a Look
While we expect FMC Technologies to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at SM Energy Co. (SM) as a good buying opportunity. The U.S. upstream energy operator – sporting a Zacks Rank #1 (Strong Buy) – has solid secular growth stories with the potential to rise significantly from the current levels.