Last month, oil drilling equipment maker FMC Technologies Inc. (FTI) announced its financial results for the fourth quarter ended Dec. 31, 2009. 

Results Beat Expectations 

For the fourth quarter, FMC Technologies reported earnings per share of 75 cents, a penny above the Zacks Consensus Estimate as well as the prior-year period. Results were helped by robust performance from its subsea oil and gas processing systems. However, revenue was down 3.7% year-over-year to $1.2 billion, as sales declined in the company’s Energy Processing Systems segment. 

For more information and more detailed analysis of the fourth quarter results, please refer to this link. 

Positive Surprise Trend 

It was the company’s third positive earnings surprise in the past four quarters. FMC has performed well during this period, with its average earnings surprise being 10.9%. This implies that the company has exceeded the Zacks Consensus Estimate by 10.9% over the last four quarters. 

Margins, Orders and Backlog Disappoints 

While FMC managed to edge past estimates (mainly on the strength of its top line), fourth-quarter margins, orders and backlog disappointed investors. Margins in both divisions were lower than expected and slid down sequentially. Total inbound orders and backlog also fell from the third quarter levels, mainly on account of the absence of large subsea projects. 

Company Outlook 

Management guided towards 2010 earnings per share in the $2.45 – $2.65 range and expects revenue to be down slightly from 2009. 

In the earnings conference call, FMC management said that operating profit margin in its largest unit (Energy Production Systems) is expected to be around 13% for 2010. This is less than the 13.3% achieved in the fourth quarter of 2009.
FMC’s Energy Production Systems unit, which makes up more than 86% of the company’s total income, sells subsea systems, including wellheads, manifolds and systems that gather and process oil and gas from offshore wells. 

Furthermore, the company did not offer any timetable on recovery and just said that it is starting to see signs of turnaround in volume in the first quarter of 2010. 

On a positive note, FMC expects subsea orders in 2010 to be significantly higher than 2009. 

Our Take 

The pace of new capital equipment orders for FMC has remained sluggish over the last few quarters due to reduced exploration and development activity in the oil and gas industry. As is the case with other equipment manufacturers, we expect FMC’s total margins to decline through the year, as the company recognizes the lower-margin backlog booked in 2009. 

However, order flow and backlog for subsea products and services will continue to be healthy and trend higher as the year goes by. FMC and its rival Cameron International Corp. (CAM) have both seen strong demand for their subsea products as deepwater drilling booms in places like Brazil. 

The company remains well positioned to receive a large share of big contracts in 2010. We are further encouraged by FMC’s recent subsea equipment deals with industry giants like Petroleo Brasileiro S.A. (PBR), StatoilHydro ASA (STO), and Total SA (TOT). 

Estimate Revisions Trend 

The improving trend is clearly visible in its near-term estimates revisions. We note that 6 of 18 analysts covering FMC Technologies have reduced their earnings estimates for the first quarter of fiscal 2010 over the past 30 days. Only 2 analysts moved in the opposite direction during this time-period. The current Zacks Consensus Estimate for the quarter stands at 64 cents. 

However, there is a complete reversal in earnings trend for the next quarter. For the second quarter of 2010, the Zacks Consensus Estimate is 64 cents (same as the first quarter). But in this case, the overall momentum in estimate revisions is favorable. Over the past 30 days, estimates have been up by 3 cents with 7 of 17 analysts covering the stock raising their estimates. There have been just 3 negative revisions during this period. We attribute this to the prospect for backlog picking back up.
With substantially fluctuating earnings trend expected for the next two quarters, our short-term recommendation on the stock remain Hold (Zacks Rank #3), meaning that FMC is expected to perform relatively in line with the overall market during the next 1-3 months. Therefore, the investors should maintain their current position in the stock over this time period.

Read the full analyst report on “FTI”
Read the full analyst report on “CAM”
Read the full analyst report on “PBR”
Read the full analyst report on “STO”
Read the full analyst report on “TOT”
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