Bearish on McDermott's Future - Analyst Blog
26 September 2011 - 3:00PM
Zacks
Shares of McDermott
International (MDR) hit a 52-week low of
$10.89 on Friday, September 23. The energy-focused engineering and
construction firm has seen its share price fall nearly 45% since
the beginning of July this year, as investors have been selling the
stock for its weak fundamentals and tepid outlook. The
disappointing second quarter results have added to this
bearishness.
Incorporated in 1959, McDermott
primarily serves the worldwide offshore oil and gas field
development activities, 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 services
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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