FBR Capital Downgrades Smith International (SII) to Market Perform; Petrobras (PZE) Contract Loss to Hit P&L

September 2, 2009 6:55 AM EDT

FBR Capital downgrades Smith International (NYSE: SII) from Outperform to Market Perform.

FBR analyst says,"We are downgrading Smith International shares to Market Perform, lowering our estimates, and lowering our price target to $38 from $50. Near term, we expect the company to disappoint expectations as the market share loss in Brazil runs through the P&L. We recently learned that Petrobras (NYSE: PZE) was working through legacy fluid contract inventories in 1H09, and the new service providers that have crews in place are leaning on Petrobras to use their products in addition to the personnel. Longer term, we do not believe SII warrants its historic multiple due to the upcoming struggle to grow at the same pace as peers without exposure to Petrobras, less operating leverage in the fluids business, and more North American leverage from the W-H Energy acquisition. The emergence of Newpark as a larger international fluids provider should also make the fluids business more competitive in this up-cycle...Our $38 target for SII is based on 20x our 2011 EPS estimate of $1.90."

Smith International, Inc. provides products and services to the oil and gas exploration and production industry in the United States and internationally.

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