Dril-Quip Beats Marginally

Dril-Quip Inc. (DRQ - Analyst Report) has reported third-quarter 2011 earnings of 58 cents per share, just about beating the Zacks Consensus Estimate of 57 cents but deteriorating 15.9% from the year-ago profit level of 69 cents.

The company registered total revenue of $155.0 million in the quarter, up 10.6% from the year-ago level of $140.1 million. The increase in revenue was mainly backed by the rise in sales of subsea equipment and growth in service revenues, partially offset by a decrease in offshore rig equipment revenues.

Operating income fell nearly 16% to $31.8 million from the year-earlier level of $37.7 million. The company also faced a considerable rise in costs. On an annualized basis, selling, general and administrative expenses rose to $18.3 million from the year-earlier level of $15.6 million, while its engineering and product development costs rose 15%.

Backlog

As of September 30, 2011, the company had a backlog of $730 million, compared with $625 million at the end of the same period last year.

Capex

Capital expenditures in the quarter were $12.3 million, compared with $26.6 million in the year-earlier quarter.

Guidance

Dril-Quip expects fourth quarter earnings to range between 53 cents and 63 cents per share.

Outlook

The key positive in the Dril-Quip story is its strong leverage to continued growth in the global deepwater drilling markets, especially in South America and the Asia-Pacific region.

Given the operator’s strong backlog, deepwater drilling and other related services are expected to remain relatively stable despite usual fluctuations in commodity prices.

However, we believe the Gulf of Mexico glitches will remain at least in the near term and Dril-Quip’s underlying business fundamentals may be affected as a major portion of its total revenue comes from this region. In particular, continued delays in normalized activity in the Gulf of Mexico following the oil spill have affected revenue conversion of the company’s backlog. Further, competition from Cameron International Corporation (CAM - Analyst Report) is also a concern.

Our long-term Neutral rating for Dril-Quip shares remain unchanged at this stage. The company holds a Zacks #4 Rank (short-term Sell rating).

Read the full analyst report on DRQ

Read the full analyst report on CAM