McDermott's Woes to Continue - Analyst Blog
28 November 2011 - 9:15AM
Zacks
Shares of McDermott
International (MDR) are currently trading
close to its 52-week low of $9.34. The energy-focused engineering
and construction firm has seen its share price fall approximately
50% since the beginning of July this year, as investors have been
selling the stock for its weak fundamentals and tepid outlook. The
disappointing third 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 September quarter – 4 cents versus
the Zacks Consensus Estimate of 13 cents and the year-ago profit of
26 cents – adversely affected by higher costs and weak activity in
the Middle East.
McDermott has already warned that
its margins will suffer next year due to lower marine activity and
fabrication work. 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 diversified product portfolio,
specialty manufacturing and service capabilities, proprietary
technological expertise, robust backlog and a solid balance
sheet.
BABCOCK&WILCOX (BWC): Free Stock Analysis Report
MCDERMOTT INTL (MDR): Free Stock Analysis Report
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