McDermott Cut to Underperform - Analyst Blog
08 September 2011 - 1:15PM
Zacks
Following the second quarter
earnings miss, we have downgraded energy-focused engineering and
construction firm McDermott International
(MDR) shares to Underperform from
Neutral.
Incorporated in 1959, McDermott
primarily serves the worldwide offshore oil and gas field
development, including front-end design and detailed engineering,
fabrication and installation of offshore drilling and production
facilities, as well as installation of marine pipelines and subsea
production systems.
Additionally, the company provides
project management and procurement services. It operates in most
major offshore oil and gas producing regions, including the U.S.,
Mexico, Canada, the Middle East, India, the Caspian Sea and Asia
Pacific.
In August 2010, McDermott completed
the spin-off of its ‘Power Generation Systems’ and ‘Government
Operations’ segments into a separate, independent and publicly
traded entity The Babcock & Wilcox Company
(BWC).
McDermott recently reported
lower-than-expected EPS for the June quarter – 27 cents versus the
Zacks Consensus Estimate of 32 cents and the year-ago profit of 34
cents – adversely affected by a less favorable geographic mix and
weak margins in the Middle East. Near-term bookings remain lumpy at
the Texas-based engineering-to-project management service provider,
as the current uncertain environment has hurt the economics of
building new oil and gas infrastructure.
Moreover, we believe that the
transfer of the power generation and government operations
(post-split) has left McDermott with a less diversified business.
As a result, the business risk profile of the reorganized McDermott
is weaker than its earlier form.
Given these concerns, we expect
McDermott to perform below its peers and industry levels in the
coming months. As such, we see little reason for investors to own
the stock. Our long-term Underperform recommendation is supported
by a Zacks #5 Rank (short-term Strong Sell rating).
Partially offsetting these
negatives are the company’s solid margins, clean execution skills
and expectations for accelerated activity levels later this
year.
BABCOCK&WILCOX (BWC): Free Stock Analysis Report
MCDERMOTT INTL (MDR): Free Stock Analysis Report
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