McDermott International: Time to Pull the Plug

Zacks

On Apr 9, Zacks Investment Research downgraded energy-focused engineering and construction firm McDermott International Inc. (MDR) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Following McDermott’s recent stock offering and disappointing first quarter operational update we have become bearish about the firm’s near-term prospects. The company’s steep operating costs, an erratic earnings trend over the last few quarters and lack of clarity about some of the big projects add to the negative sentiment.

Detailed Analysis

Of late, McDermott shares have been under the hammer after the company declared its intention to offer around 10,000,000 stocks at $25.00 per apiece. Separately, McDermott warned that its first quarter results might be worse-than-expected, with profit margin – from the operation of backlog projects – not able to cover its fixed expenses and restructuring costs.   

As it is, McDermott’s operating numbers over the past few quarters have been highly unpredictable, as it had to deal with steep operating costs, competitive pressure and project implementation issues.

McDermott – which segregated its ‘Power Generation Systems’ and ‘Government Operations’ segments into a separate, independent and publicly traded company Babcock & Wilcox Co. (BWC) in 2010 – has already suspended guidance for the foreseeable future until it pushes ahead with organizational changes to shore up its flagging income, cash flows and credit metrics. Additionally, the company sees the large Papa Terra project in Brazil contribute to its earnings much later than earlier projections.

The offshore oilfield service provider is also struggling with cost overruns in its Malaysia and Saudi Arabia developments, which may lead to lower returns going forward. The financial picture has been further aggravated by deteriorating operating margins in its shallow water projects, with the company trying hard to expand into high margin deepwater projects.   

Stocks That Warrant a Look

While we expect McDermott to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Matrix Service Co. (MTRX) and Cameron International Corp. (CAM) in the oilfield machineries and equipment space. While Matrix carries a Zacks Rank #1 (Strong Buy), Cameron holds a Zacks Rank #2 (Buy).

Read the Full Research Report on MDR
Read the Full Research Report on BWC
Read the Full Research Report on MTRX
Read the Full Research Report on CAM


Zacks Investment Research

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