Tuesday, Credit Suisse downgraded Smith International Inc. (SII) shares to Neutral from Outperform and lowered its price target to $27 from $34. The brokerage lowered its 2010 EPS estimate to $0.95 from $1.00, and its 2011 estimate to $1.80 from $2.00.
Analyst Handler noted that SII's equity issuance, 28 million shares/32.2 million, or 15%, with greenshoe, appears likely to be dilutive and the rationale is not persuasive. The analyst lowered estimates and reduced his target multiple applied to 2011 EPS to 15x from 17x to reflect additional uncertainty regarding potential upcoming corporate action.
The analyst's lower 2011 EPS reflects higher share count, down $0.29, partially offset by some assumed contribution from acquisitions, up $0.06, and the modest interest expense savings associated with likely repaying some of the term debt, up $0.03.
The analyst said that SII offered that the equity issuance would help to fund cash needs associated with working capital growth in a now better-looking 2010 than seemed previously; several small acquisitions, perhaps as many as six by the end of first quarter of 2010; some de-leveraging in front of revolver expires in 2010; and continued capital associated with the geographic expansion of Pathfinder.
With 25% net debt to cap currently, the urgency to issue equity, before closing some of the acquisitions that would give the analyst insight as to the growth prospects and before enjoying some of the 2010 recovery that would presumably help share prices, is not clear to him. Instead it gives a defensive impression.
Currently, SII is down $3.14 or 10.21% and trading at $27.62.
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