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On Jun 19, 2013, we retained our Neutral recommendation on oil drilling equipment maker Cameron International Corp. (CAM - Analyst Report). Our investment thesis is supported by a Zacks Rank #3 (Hold).

Why the Reiteration?

The company has a diversified product portfolio, specialty service capabilities and proprietary technological expertise. Other positives for Cameron include a strong backlog position, growing international operations and a favorable outlook for subsea activity levels.

However, we believe that Cameron’s current valuation adequately reflects its growth profile. Moreover, with markets remaining competitive and pricing likely to be weak, we see no obvious catalyst in Cameron’s business to significantly push the stock price higher.

Detailed Analysis

Houston, TX-based Cameron is a leading provider of underwater pressure control, drilling and compression equipments to operators globally. Its existing backlog of over $10 billion not only reflects steady demand from its customers but also offers long-term earnings and cash flow visibility.

With about two-thirds of its total revenue coming from outside North America, Cameron’s international operations are expected to be a key growth driver going forward. Latin America, Asia Pacific and the Middle East are the important markets in this regard.

Following the Gulf of Mexico oil spill incident, the company – which counts National Oilwell Varco Inc. (NOV - Analyst Report) and FMC Technologies Inc. (FTI - Analyst Report) as its competitors – continues to benefit from the near-term requirements for better offshore safety equipments. Stricter regulations on drilling have translated into enhanced opportunities for equipment suppliers like Cameron.

However, shares of the company are fairly valued at current levels, considering the sensitivity of Cameron’s business to gas/oil price volatility, as well as exploration and production spending patterns, costs, geo-political risks, competition and the advent of new technologies.

Moreover, the company used to be a leading supplier of subsea production systems (Christmas trees), but lost market share to competitors in the last few years. While the new order bookings should help improve Cameron’s market share position, we do not expect it to attain its former leadership position.

Stocks That Warrant a Look

While we expect Cameron to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Dawson Geophysical Co. (DWSN - Snapshot Report) as a good buying opportunity. This energy equipment service provider – sporting a Zacks Rank #1 (Strong Buy) – has solid secular growth stories with potential to rise significantly from current levels.

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