FMC Technologies Is Beginning To Crack

I have been short FMC Technologies (FTI) for a while now. My thesis was that the dearth in deep water E&P would eventually sink FMC these companies. They all traded up after Schlumberger’s (SLB) takeover of Cameron (CAM) in August. However, I may have gotten my big break after the company showed cracks in Q4.

Subsea Technology Division Segment Is Starting To Crack

Total revenue for the last quarter was off 8%. At over 70% of total revenue the Subsea Tech segment remains the company’s bread and butter. Vis-a-vis equipment sales for land drillers, subsea equipment sales have been more stable. This segment is starting to crack as revenue was off 7% sequentially; this followed a 12% decline in Q3.

EBITDA Margins Will Likely Suffer From Here

Even more damning is that Subsea Tech generates all of the company’s operating income. Surface Tech and Energy Infrastructure both accumulated operating losses in Q4. Meanwhile, Subsea Tech had an operating income margin of 11% on revenue of just over $1 billion. That margin is down from the 15% – 16% the segment has previously generated.

It could get worse. Analysts expect Q1 2016 revenue to fall to about $1.3 billion, which equates to a 10% decline Q/Q and 24% Y/Y. Over the past year EBITDA margins have been consistent at 13% – 15% despite the drop off in revenue; management has been laying people off in Subsea Tech and cutting SG&A expense. FTI is only off about 25% over the past year, versus a flat return for the S&P 500 (SPY). However, if revenue falls by double-digits as expected, EBITDA margins will likely suffer in the first half of 2016. That could cause a sharp drop in the stock and my short play will pay off handsomely. At least that’s the plan.