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Here's Why McDermott (MDR) is Down 44% Since Q3 Earnings

Zacks Equity Research

Shares of McDermott International, Inc. MDR have plunged nearly 44% since earnings announcement on Nov 4. In fact, the stock price hit a new 52-week low of 93 cents in last Friday’s trading session. This extends the company’s downward trend on the bourse over the past year, during which the stock has shed 88.2% of value compared with the industry’s 31% decline.

Reasons for this downside were weaker-than-expected third-quarter results and other headwinds. Let’s delve deeper.

McDermott recently released third-quarter 2019 results, missing on both earnings and revenues. The oilfield equipment provider incurred adjusted loss per share of $1.80, significantly wider than the Zacks Consensus Estimate of 21 cents. However, in the year-ago quarter, the company reported earnings of 20 cents.  

The lower-than-expected earnings reflect the impact of higher costs plus goodwill and asset impairments. Particularly, quarterly expenses surged to $2,173 million from the year-ago figure of $1,986 million.

Revenues of $2,121 million also lagged the Zacks Consensus Estimate of $2,367 million. Moreover, the top line fell 7.3% from the year-ago quarter.

Shares of McDermott plunged to new lows as work at its headquarters gets stalled following the company's alleged delay in payments to its general contractor.

Revenue Pipeline

McDermott boasts a ‘Revenue Opportunity Pipeline’ of $89.1 billion including Backlog, Bids & Change Orders Outstanding and Target Projects. As of Sep 30, its backlog was $20.1 billion, surging 74.78% year over year.

The company’s Bids & Change Orders Outstanding came in at $11.8 billion while Target Projects summed $57.2 billion. Its revenue pipeline is primarily boosted by North, Central & South America (‘NCSA’), and Middle East & North Africa (‘MENA’) segments, given a continued momentum in offshore/subsea, downstream and LNG markets.

Capital Expenditure & Balance Sheet

During the quarter, McDermott spent approximately $32 million on capital programs, higher than the year-ago figure of $19 million. As of Sep 30, the company had $677 million in cash and cash equivalents and total debt of $3,450 million.

McDermott International, Inc. Price, Consensus and EPS Surprise

McDermott International, Inc. Price, Consensus and EPS Surprise

McDermott International, Inc. price-consensus-eps-surprise-chart | McDermott International, Inc. Quote

Deals & Divestment Plan

In the reported quarter, McDermott inked a deal to secure a funding worth up to $1.7 billion from specific lenders. However, the company disappointed investors with the news of its withdrawal of 2019 outlook and high-debt costs.

At the same time, McDermott terminated the earlier-announced sale of its industrial storage tank business. While this created some uncertainty about the company’s future among investors, its high interest rate of roughly 10% on the new debt raised concerns over its elevated interest expense. However, this Houston-based company continues to mull over divesting its industry-leading Lummus Technology business after piquing prospective buyers’ curiosity.

Zacks Rank & Key Picks

McDermott currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the energy space are Murphy USA Inc. MUSA, Delek Logistics Partners, L.P. DKL and World Fuel Services Corporation INT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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