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Why did JANA Partners acquire a stake in Cameron International?

Smita Nair

JANA Partners opens new positions in 4Q 2013 (Part 4 of 4)

(Continued from Part 3)

JANA Partners and Cameron International

JANA Partners said in its year-end letter that despite record backlog and revenues, Cameron International Corp. (CAM) consistently missed earnings expectations last year. The hedge fund made Cameron one of its biggest commitments following the oilfield equipment maker’s 3Q earnings miss. JANA is currently one of Cameron’s largest shareholders.

Cameron is a market-leading provider of fluid control products to the energy sector.

The letter states:

  1. “We believe Cameron’s problems are self-inflicted, temporary and remediable. Expansion of a key facility in Berwick, LA to meet growth in demand for blowout preventers did not come on line as expected, forcing CAM to job out work and pressuring margins. The manager in charge of that business unit has left the company; the senior leadership is laser focused on the issue; and the expansion is scheduled to be operational in the middle of this year. Management demonstrated their conviction in the outlook for the business and their belief that the stock is trading below intrinsic value when they repurchased more than $750 million of stock at $55 per share in the first ten weeks of the fourth quarter and then increased the repurchase authorization to $1.0 billion and raised $750 million in financing to fund it. Management has also begun to take steps to rationalize CAM’s portfolio through the sale of non-core assets, starting with the recently announced sale of its reciprocating compression business to GE, with proceeds committed to additional share repurchases.”

The hedge fund further said:

  • “We believe there remains still more portfolio pruning to be done and that asset sales, balance sheet capacity and future free cash flow provide considerable powder for even more share repurchases. As 2014 progresses we forecast a recovery in margins, and the reduced expectations for 2014 set up the possibility of management beating the consensus rather than consistently missing. We look out and see the potential for a more focused, stronger Cameron with normalized earnings power north of $5.00 per share. We believe that once confidence is restored in CAM, the stock should trade at a premium multiple to oil field services peers, considering Cameron’s significant subsea exposure and large percentage of recurring, high-margin aftermarket earnings.”

For 4Q 2013, Cameron posted a 21% increase in revenue, to $2.9 billion, driven by strong growth its drilling, surface systems, and OneSubsea businesses. For the year, revenue was up 16%, to $9.8 billion year-over-year. GAAP net income was up 11%, to $243.1 million, or $0.95 per diluted share. For the year, Cameron had record orders, totaling $12.4 billion, up 13% from 2012. In January, the company announced the sale of its Reciprocating Compression business unit to GE for approximately $550 million, and the intention to divest its Centrifugal Compression business. The Centrifugal Compression business recorded sales of $365 million for the year ended December 31, 2012. With the sales, Cameron said it intends to optimize its asset base and focus on its core markets.

Cameron repurchased 27 million shares in 2013 at a cost of $1.5 billion, resulting in an ending diluted share count of 223 million. The company increased share authorizations by $1.9 billion in 2013, and an authorization of $843 million remained at the end of 2013. Also, the oilfield equipment maker issued $750 million of unsecured senior notes in the fourth quarter to help fund the share repurchase.

To learn more about recent hedge fund positions, see Pershing Square’s new positions and stake increases in 1Q 2014.

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