Zacks Investment Research downgraded McDermott International (MDR), an energy-focused engineering and construction firm, to a Zacks Rank #4 (Sell) on Apr 6, 2013.
Why the Downgrade?
During the fourth-quarter 2013 earnings release, McDermott reported total costs and expenses to be roughly $913.0 million, which represents a significant increase of 17.1%, compared to the year-ago period.
Besides that, McDermott derives its revenues from companies in the oil and gas exploration and production (E&P) industry, a highly volatile and cyclical sector that is directly exposed to commodity prices. A potential drop in oil and gas prices could curtail deepwater drilling and subsea equipment demand, adversely affecting bookings at McDermott.
Moreover, McDermott has hinted toward revenue of $3 billion in 2013, lower than the $3.6 billion in 2012, mainly due to uncertainty around the timing of some of the company’s bigger awards.
Additionally, McDermott foresees the large Papa Terra project in Brazil to contribute to its earnings by late 2013 or start of 2014, as against the previous assumption of an earlier timeframe, which is reflected in the company’s expectation of negative long-term sales growth rate of 16.6%.
The Zacks Consensus Estimate for first-quarter 2013 has decreased 20% to 16 cents per share over the last 60 days. For 2013, all the estimates (10 out of 10) were revised downward over the last 60 days, sinking the Zacks Consensus Estimate by 15.9% to 74 cents per share.
Stocks to Consider
Three firms in the energy sector that are expected to significantly outperform the U.S. equity markets in the next one to three months are Helmerich & Payne Inc (HP), Calumet Specialty Products Partners LP (CLMT) and Stone Energy Corp. (SGY). All three stocks carry a Zacks Rank #1 (Strong Buy).
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