We are downgrading oil drilling equipment maker FMC Technologies Inc. (FTI) shares to Neutral from Outperform purely on valuation grounds, as we see limited near-term price upside.
 
FMC Technologies currently trades at a premium to its peers, which, in our view, is justified given its dominant market share, technology leadership and efficient execution skills. However, at current valuations, we have a difficult time justifying sufficient potential return to support an Outperform rating.
 
The pace of new capital equipment orders for FMC Technologies has remained sluggish over the last few quarters due to reduced exploration and development activity in the oil and gas industry. Though the situation has improved modestly of late (with oilfield service companies seeing more stable demand), we believe that the industry-wide slump is still far from over. As is the case with other equipment manufacturers, we expect FMC Technologies’ total margins to decline through the year, as the company recognizes the lower-margin backlog booked in 2009.
 
This is reflected in our downgrade of the company’s shares to Neutral. Unless the outlook for service providers improves further, we expect FMC Technologies to perform in line with the market.
 
Houston, Texas-based FMC Technologies, which currently retains a Zacks #3 Rank (short-term ‘Hold’ rating), is a leading manufacturer and supplier of technology solutions for the energy industry. The company, which operates 25 manufacturing facilities in 15 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.
 
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