In August, I wrote about three risks that could hurt Cameron International's (NYSE:CAM) stock, as well as three tailwinds that could lift the share price of this oilfield services and equipment specialist. It's important for investors to analyze the risks a company faces and those things working in its favor. No company is perfect, and there is no such thing as a "can't miss" investment opportunity. It's all about probabilities.
To channel my inner Warren Buffett, no stock is a buy at any price. Cameron International's stock is up 25% in 2014, and is near its all-time high. Is a stock that has run so fast this year worth buying, or is it beyond the price where the opportunity and value are worth the risks? Let's see.
All-time high isn't an unbreakable wall
Just because a company's stock price is at or near its all-time high doesn't mean it's due for a retreat. Companies grow, buy back shares, and expand their businesses in ways that increase value all the time. This is, after all, why we invest in stocks. Motley Fool co-founder David Gardner has said many times that he's not afraid to buy stock near its all-time high and actually views strong price appreciation as a positive indicator.
Now, I'm no David Gardner, but the point is clear: Just because a stock is going up doesn't mean it's due for a "correction." And it looks like Cameron International has a lot of things in its favor going forward.
What's driving the business?
CEO Jack Moore called Cameron International's partnership with Schlumberger (NYSE:SLB) one of the most transformative moves in the company's 180-year history. Working with Schlumberger to leverage the two companies' different strengths is a (I hate this term, but it's appropriate here) "win-win" scenario for these potential competitors.
The joint venture, called OneSubSea -- 60% of which Cameron owns -- has already begun adding significant value in both current and future business. Cameron classifies OneSubSea's results under its deepwater and production systems division, which carried a backlog of $9.2 billion at the end of the last quarter. According to the company's most recent earnings report, $4 billion of that backlog was attributable to OneSubSea.
While there is some concern with offshore production and exploration -- the industry has been warning of anticipated softness that could last a couple years -- OneSubSea addresses many of those worries. Specifically, it boosts production and throughput at offshore sites, helping maximize the return on the incredibly high development costs of deepwater oil and gas projects.
This is a competitive business, but Cameron and Schlumberger are acknowledged leaders in technology, technical expertise, and subsea systems, and their partnership is formidable. Lastly, most of the softness in offshore is expected to be in more traditional areas, while deepwater and harsh-condition drilling is expected to be relatively strong.
Valuation metrics and returning value
Earnings growth has helped to drive Cameron's share price up this year:
As you can see, it's not just total income, but earnings per share. This is being powered by an active program of stock buybacks, which has already reduced shares outstanding a whopping 16% in the past several years:
Management has committed to buying back additional shares over time, which should further enhance per-share returns if the program continues to execute well. Let's look at price-to-earnings ratios:
As you can see, Cameron International looks reasonably priced today, whether by trailing 12-month earnings or analysts' consensus estimate of future earnings. It's not exactly a "steal," but reasonable based on its historical P/E valuation.
Partnerships, increased demand of deepwater services bode well
Short-term price movement is hard to accurately predict because it's driven by trading, but over time a company's performance and the market's short-term volatility tend to intersect. Why am I telling you this? Because this isn't a promise that Cameron International's stock will be higher in three weeks or six months, or even in one year. There are just too many unknowables that have nothing to do with the company -- or its industry -- that could affect the market, and therefore the stock price.
I am willing to make a long-term projection, though: I'm confident that Cameron International's business prospects over the next three to five years are sound, and that management has done an admirable job of positioning the company for growth in the deepwater market. The risks are real, but the potential returns -- and the company's history of managing risk -- outweigh those obstacles. If you're willing to invest for the long haul (i.e., three to five years or longer), Cameron International has a good shot at being a solid long-term winner. With that said, I wouldn't go "all-in" today, but instead look to build a position with several investments over the next six months or so.
Jason Hall has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.