Strength at Acergy Priced In
Acergy S.A. (ACGY) delivered strong financial results for the fiscal second quarter. Net profit was up 28%, on the back of a 17% increase in operating revenue, driven by higher activity levels and improved project performance.
Acergy completed several deepwater projects during the quarter, including the Moho Bilondo, Mondo, PRA-1, and Maari projects. Visibility is good and the medium to long-term view for the business remains robust. We, however, believe that despite some recent weakness, current valuation reflects all the positives concerning the company's strong cyclical leverage and revenue growth prospects, thereby keeping our Hold recommendation unchanged.
With the sale of its Conventional and IMR assets, ACGY is nearing the completion of its restructuring program. This involved increasing its focus on the deepwater markets, divesting non-core assets and strengthening its balance sheet. With the restructuring issues behind it, Acergy has positioned itself to capitalize on the current oilfield cycle. This is reflected in Acergy's growing backlog, which at the end of second quarter stood at approximately $3.6 billion.
In the first half, Acergy announced the award of two offshore engineering and construction contracts from Denmark-based DONG Energy. During the last few months, the company received two important contracts in Angola. Further, in May this year, Acergy was awarded a subsea fabrication contract valued at approximately $50 million by Cameron Offshore Systems for the fabrication and assembly of assorted subsea structures for use at the Usan Oilfield located offshore Nigeria.
While Acergy ADRs have pulled back recently, they are still up significantly in this cycle. We, however, see limited upside from current levels and continue to remain cautious on the company's project execution skills and the long-term sustainability of the recent margin gains given rising costs pressures.
Upgrading Priceline to a Buy
We are upgrading Priceline.com's (PCLN) shares from Hold to Buy. The strength in Priceline.com's international business and operating expense controls continue to produce impressive operating leverage. For some time, Priceline.com has been producing growth above market expectations.
Priceline increased its operating margin to 8.8% in 2006 and 15.5% in 2007. We think the company's strong revenue growth and operating leverage should boost Priceline.com's operating margin to 19% in 2008 and 23% in 2009. And that points to sustainable long-term earnings growth of 20%.
In addition, we think the company is well-positioned to weather a slowdown in consumer discretionary spending because of the value proposition it offers customers and travel suppliers. PCLN shares are off about 30% from its 52-week high, and we think that represents an attractive buying opportunity. Priceline.com has stellar track record for beating quarterly EPS estimates and raising guidance for future quarters. We expect the company to beat and guide higher for the next few quarters.
Priceline.com shares trade at 19.3x our 2008 EPS estimate and 15.1x our 2009 EPS estimate. We think this valuation is attractive, given the company's track record of strong revenue growth and impressive operating leverage. Our target price is $142, or 20x our 2009 EPS estimate.
