Oceaneering International, Inc.

Analysts revised their estimates for both 2011 and 2012 off of the strong quarter, sending the stock to a Zacks #2 Rank (Buy).

The company also initiated a regular quarterly dividend earlier this year that currently yields 1.5%. Expect this dividend to rise along with its earnings over the next few years.

Company Description

Oceaneering International provides engineered services and products primarily to the offshore oil and gas industry, with a focus on deepwater applications. The company reports its results in five business segments:

• Remotely Operated Vehicles (submersible vehicles operated from the surface and widely used in the offshore oil and gas industry): 35% of total revenue
• Subsea Products (built-to-order specialty subsea hardware): 35%
• Subsea Projects (subsea installation, inspection, maintenance and repair services, primarily in the U.S. Gulf of Mexico): 11%
• Inspection (testing/inspection and integrity management and assessment services to satisfy contractual structural specifications, internal safety standards or regulatory requirements): 11%
• Advanced Technologies (serves the defense, entertainment and aerospace industries): 12%

Approximately 51% of revenue comes from outside of the U.S.

The company was founded in 1965 and is headquartered in Houston, Texas. It has a market cap of $4.5 billion.

Strong Second Quarter Results

Oceaneering International reported better than expected results for the second quarter on July 27. Earnings per share came in at 52 cents, beating the Zacks Consensus Estimate of 48 cents. It was a 6% increase over the same quarter in 2010.

Revenue jumped 18% to $545.8 million, well ahead of the Zacks Consensus Estimate of $506.0 million. Strength in the company's Remotely Operated Vehicles and Subsea Products divisions were partially offset by weakness in its Subsea Projects and Advanced Technologies segments.

The gross margin contracted from 26.6% of revenue to 23.1%, however, due to declines in the Subsea Projects segment. The company benefited from a substantial decrease in interest expense, which helped drive a 5% increase in net income.

Raised Guidance

Management raised its guidance for the remainder of the year following strong Q2 results. The company now expects to earn between $1.90 and $1.98 per share, up from previous guidance of $1.83-$1.95.

This prompted analysts to revise their estimates higher too, sending the stock to a Zacks #2 Rank (Buy). The Zacks Consensus Estimate for 2011 is $1.99, slightly higher than guidance. This represents 9% growth over 2010 EPS.

The 2012 consensus estimate moved higher too and currently sits at $2.49, corresponding with 25% annual EPS growth.

As you can see in the company's Price & Consensus chart, consensus estimates have been trending significantly higher over the last several months as OII has delivered 5 consecutive positive earnings surprises:

Management also appears optimistic beyond just 2011. CEO M. Kevin McEvoy stated in the second quarter press release, "Looking beyond 2011, our belief that the oil and gas industry will continue to invest in deepwater projects remains unchanged. Deepwater remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates."

Dividend Initiation

Earlier this year Oceaneering International initiated a regular quarterly dividend of $0.15 per share. This equates to an annual yield of 1.5%.

The company carries no long-term debt, so its payout ratio of 32% looks very manageable. Expect the company to raise its dividend within the next year if its growth projections materialize.

Valuation

The valuation pictures looks reasonable for OII. Shares trade at 18.0x 12-month forward earnings, a slight premium to its 10-year median of 16.4x. This premium seems justified, however, given the company's projected growth rates.

The Bottom Line

With strong earnings momentum, an optimistic outlook and a solid dividend, Oceaneering International offers a great growth and income opportunity.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.