A month has gone by since the last earnings report for MRC Global (MRC). Shares have lost about 14.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is MRC due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
MRC Global Lags Q2 Earnings Estimates, Revises View
MRC Global reported weaker-than-expected results for the second quarter of 2019. Its earnings and sales lagged respective estimates by 4.55% and 5.28%.
Its adjusted earnings in the reported quarter were 21 cents per share, lagging the Zacks Consensus Estimate of 22 cents. Also, the bottom line declined 35.5% from the year-ago figure of 31 cents due to weak segmental businesses.
Weak Segmental Businesses Affect Revenues
In the reported quarter, MRC Global’s revenues totaled $984 million, reflecting a year-over-year decline of 9.1%. Revenues were adversely impacted by weak segmental results.
Further, the company’s revenues lagged the Zacks Consensus Estimate of $1,039 million.
Based on MRC Global’s product line, revenues from carbon steel pipe, fittings and flanges declined 18.2% year over year to $319 million while that from valves, automation, measurement and instrumentation grew 1.3% to $380 million, and that from gas products moved down 1.4% to $145 million. Sales for general oilfield products declined 19% to $98 million and that for stainless steel, and alloy pipe and fittings fell 14.3% to $42 million.
Revenues from the Upstream sector were approximately $284 million, declining 7.5% from the year-ago quarter. Midstream sales totaled $421 million, roughly 10.8% below the year-ago quarter while Downstream sales totaled $297 million, declining 7.9% year over year.
The company has three reportable segments — the U.S., Canada and International. Information on these segments for the quarter under review is given below:
Sales generated from the U.S. segment totaled $806 million, declining 8.2% year over year. The results were adversely impacted by weakness in upstream, midstream and downstream businesses.
Revenues from the Canada segment moved down 27.5% year over year to $58 million due to weakness in upstream and downstream businesses. However, results in the midstream business improved year over year.
Sales from the International segment declined 3.2% to $120 million. The results were adversely impacted by weakness in midstream, partially offset by strength in upstream and downstream businesses.
Gross Margin Flat Y/Y
In the quarter under review, MRC Global’s cost of sales declined 10.5% year over year to $810 million. Adjusted gross profit in the quarter moved down 9.1% year over year to $190 million. Margin remained flat at 19.3%. Selling, general and administrative expenses were down 2.2% year over year to $133 million.
Adjusted earnings before interest, taxes, depreciation and amortization declined 23.1% year over year to $60 million while adjusted EBITDA margin was down 110 bps at 6.1%. Interest expenses were flat year over year at $10 million.
Balance Sheet and Cash Flow
Exiting second-quarter 2019, MRC Global had a cash balance of $35 million, up 29.6% from $27 million at the end of the last reported quarter. Long-term debt balance declined 1.1% sequentially to $734 million.
In the first half of 2019, the company generated net cash of $8 million from operating activities versus $139 million used in the year-ago period. Capital spending totaled $6 million versus $9 million in the year-ago quarter.
In the first half of 2019, the company used $50 million for repurchasing shares and $12 million for paying out dividends.
Exiting the quarter, it had approximately $25 million left under its $150-million share buyback program authorized in October 2018. This program will expire by 2019 end.
In the quarters ahead, MRC Global is concerned about weakness in consumer spending. However, it believes that its focus on cost reduction, lowering debts and generation of free cash flow will be advantageous.
Dismal second-quarter results and prevailing concerns led the company to lower its projections for 2019. Revenues are now predicted to be $3,850-$4,050 million, down from the previously stated $4,070-4,270 million. Revenues for the third quarter are predicted to rise 2-4% sequentially.
Adjusted gross profit margin will be 19.4-19.6%, down from 19.7-19.9% mentioned earlier. Selling, general and administrative expenses will likely be $540-$550 million, down from the previously stated $555-$575 million, and adjusted EBITDA will be $230-$250 million, down from $260-$290 million given earlier. Tax rate will be roughly 25%.
Cash flow from operations will likely be $180-$220 million, higher than previously stated $150-$200 million. Capital spending will likely be $15-$20 million, down from the earlier $20-$25 million.
Earnings per share will be roughly 75-95 cents, revised from the previously stated 70 cents to $1.00.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -11.5% due to these changes.
At this time, MRC has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, MRC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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